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Question 3. A 1-year European put option on a stock with strike price of $50 is...

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Economics

Question 3. A 1-year European put option on a stock with strikeprice of $50 is quoted as $7; a 1-year European call option on thesame stock with strike price $30 is quoted as $5. Suppose you longone put and short one call (one option is on 100 share).

a) Draw the payoff diagram for your put position and callposition.

b) After 1-year, stock price turns out to be $45. What is yourtotal payoff? What is your total profit/loss?

Answer & Explanation Solved by verified expert
4.3 Ratings (548 Votes)
a Payoff diagram for the long put position is as belowStrike price is 50 option price is 7From the payoff diagram you can see that the premium paid 7 andhence it is in the negative side When the the stock prices lessthan 50 the long put option    See Answer
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