You are concerned that faltering NAFTA renegotiations could jeopardize U.S. exports of cheese to Mexico. You...

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You are concerned that faltering NAFTA renegotiationscould jeopardize U.S. exports of cheese to Mexico. You think thatcurrent options prices are too cheap, since you believe prices willbe more volatile than implied by the options prices. Using theinformation below on ATM options contracts for May 2018Cash-Settled Cheese futures, assemble a straddle that will profitif you are correct that there is more volatility in the market thanis currently priced into the options. • Current futures price:$1.546/lb • $1.550 call premium: $0.31 • $1.550 put premium:$0.35
a) Explain the positions you would take to speculatebased on the belief above.
b) Find the price range(s) over which this belief wouldbe profitable as well as your maximum profit and maximumloss.
c) Draw the payoff diagram for the straddle. For thispayoff diagram, include both of the options positions as well asthe combined position.

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3.6 Ratings (618 Votes)

For this exampleC Call premium P Put premium S Spot price on expirationK strike pricea Explain the positions you would take to speculate based onthe belief aboveWe can create a straddle See Answer

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You are concerned that faltering NAFTA renegotiationscould jeopardize U.S. exports of cheese to Mexico. You think thatcurrent options prices are too cheap, since you believe prices willbe more volatile than implied by the options prices. Using theinformation below on ATM options contracts for May 2018Cash-Settled Cheese futures, assemble a straddle that will profitif you are correct that there is more volatility in the market thanis currently priced into the options. • Current futures price:$1.546/lb • $1.550 call premium: $0.31 • $1.550 put premium:$0.35a) Explain the positions you would take to speculatebased on the belief above.b) Find the price range(s) over which this belief wouldbe profitable as well as your maximum profit and maximumloss.c) Draw the payoff diagram for the straddle. For thispayoff diagram, include both of the options positions as well asthe combined position.