5. Suppose there is a variety of European calls and puts on an underlying asset. For each of the following trading strategies, carefully draw the profit diagrams (at maturity) and explain under what circumstances investors would want to pursue them. (a) Long call with strike price K₁ and short call with strike price K₂ > K₁. (b) Short call with strike price K and long put with strike price K.

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5. Suppose there is a variety of European calls and puts on an underlying asset. For each
of the following trading strategies, carefully draw the profit diagrams (at maturity)
and explain under what circumstances investors would want to pursue them.
(a) Long call with strike price K₁ and short call with strike price K₂ > K₁.
(b) Short call with strike price K and long put with strike price K.
Transcribed Image Text:5. Suppose there is a variety of European calls and puts on an underlying asset. For each of the following trading strategies, carefully draw the profit diagrams (at maturity) and explain under what circumstances investors would want to pursue them. (a) Long call with strike price K₁ and short call with strike price K₂ > K₁. (b) Short call with strike price K and long put with strike price K.
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