Suppose you have the following 4 option contracts that expire in exactly 1 year from today. Premium Strike...

50.1K

Verified Solution

Question

Finance

Suppose you have the following 4 option contracts that expirein exactly 1 year from today.
Premium
Strike Price
Call 1
$9.89
$75
Call 2
$4.98
$85
Put 1
$3.41
$75
Put 2
$8.30
$85
You establish an option positioncombining the purchase of Call 1 and Put 2 and the simultaneoussale of Call 2 and Put 1.
What is the cost of establishing this position?
Complete the following table, calculating the payoffs of the 4options, the net cost of the position, and the profit of theoverall combination.
Stock Price
$65
$70
$75
$80
$85
$90
$95
Payoff Long Call 1
Payoff Short Call 2
Payoff Long Put 2
Payoff Short Put 1
Terminal Value
Net Premium Paid
Profit
What must be the risk-free rate of return given what you foundin part (b)?

Answer & Explanation Solved by verified expert

3.7 Ratings (417 Votes)

Premium Strike Price Call 1 989 C1 75 K1 Call 2 498 C2 85 K2 Put 1 341 P1 75 K1 Put 2 830 P2 85 K2 You establish an option position combining the purchase of Call 1 and Put 2 and the See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Suppose you have the following 4 option contracts that expirein exactly 1 year from today.PremiumStrike PriceCall 1$9.89$75Call 2$4.98$85Put 1$3.41$75Put 2$8.30$85You establish an option positioncombining the purchase of Call 1 and Put 2 and the simultaneoussale of Call 2 and Put 1.What is the cost of establishing this position?Complete the following table, calculating the payoffs of the 4options, the net cost of the position, and the profit of theoverall combination.Stock Price$65$70$75$80$85$90$95Payoff Long Call 1Payoff Short Call 2Payoff Long Put 2Payoff Short Put 1Terminal ValueNet Premium PaidProfitWhat must be the risk-free rate of return given what you foundin part (b)?

	Premium	Strike Price
Call 1	$9.89	$75
Call 2	$4.98	$85
Put 1	$3.41	$75
Put 2	$8.30	$85

Stock Price	$65	$70	$75	$80	$85	$90	$95
Payoff Long Call 1
Payoff Short Call 2
Payoff Long Put 2
Payoff Short Put 1
Terminal Value
Net Premium Paid
Profit