A call option with a strike price of $50 costs $2. A put option with a strike price of $45 costs $3. Explain how a strangle can be created from these two options. What is the pattern of profits?

Q: A4) Finance What is a pair of options that will create a payoff profile for a long straddle?

A: Solution:- Payoff means the cash flow on maturity.

Q: What are the 4 basic option positions? Please draw their Profit/Loss Profile.

A: Option position means any open Long or short position in options derivatives. In options, we can buy…

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Q: Value of an option depends on five factors. Explain how each of the five factors affects the option…

A: The Black-Scholes model is one of the major concepts used in modern financial theory. A mathematical…

Q: Compared to short hedging, the advantage to using a put option is: A. Put options involve a…

A: A put option is a contract giving the owner the right, but not the obligation, to sell the…

Q: 4 and 5, assume the effective 6-month rate is 2%, the S&R $1020, and use these premiums for S&R…

A: (a) Buy one 950-strike call and sell two 1050-strike calls:Calculate premiums:Premium for buying one…

Q: 1. Draw a picture of the payoff of the option strategy at expiration as a function of the stock…

A: Here Premium paid = $11 + $20 = $31 Premium received = $8 + $ 16= $24 Thus Net premium paid = 31 -24…

Q: 1. Assume that you want to secure a purchase at strike price and you have the following information…

A: Strike Price is $50 Put Premium is $6 Call Premium is $7 Probable Market Value at Maturity is…

Q: which one is true? for any type of option strategy, the payoffs will never be negative  for any type…

A: Option C is true.

Q: Consider a two-period binomial market model for an underlying asset with price process St at each…

A: Hello. Since your question has multiple sub-parts, we will solve the first three sub-parts for you.…

Q: Consider two call options on the same stock. One has a strike price of 98 and the other has a strike…

A: Solution:- Call option is an option to buy the underlying asset at strike price, if the price of…

Q: Why are options being sold at prices higher than their strike value?

A: Option: An option is a special type of contract which gives its holder the right but not obligation…

Q: Suppose that put options on a stock with strike prices $18 and $20 cost $2 and $3.50, respectively.…

A: A put option provides the right for selling the stock at a specified price but not the obligations…

Q: A call option's premium minus its intrinsic value is known as its: Choose the right anwer a. No…

A: Call options refers to the option contract where contract holder obtain a right to buy underlying…

Q: 1. The spread you use if you expected a very large price move of the underlying, but were unsure of…

A: Spread The difference that arises when two rates or prices are compared is known as a spread. The…

Q: the higher the strike price the intrinsic value of a put option and the the the premium you are…

A: Correct answer is (d) higher, higher

Q: Options have a unique set of terminology. Define the following terms: (11) In-the-money call

A: The term "In the money" (ITM) relates to an option that has inherent value.

Q: 2. Suppose call and put prices are given by: Strike Call Premium Put Premium 80 22 4 100 9 21 105 5…

A: The put and call options are called as derivative securities as their prices are derived from…

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A: A contract for an option grants the buyer the right to sell or buy the assets or securities at the…

Q: a) Using the formula for Put Call Parity, what combination can you make of options positions and the…

A: a. Put-call parity is a fundamental concept in options pricing theory that relates the prices of…

Q: Compare the binomial and Black-Scholes option pricing models. What are their differences and…

A: The Binomial and Black-Scholes option pricing models are two prominent methods used to estimate the…

Q: Compared to long hedging, the advantage to using a call option is: A. Call options involve a…

A: Call option contract gives the contract holder a right to purchase shares or stocks at some future…

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A: The Black-Scholes-Merton model is a fundamental tool in finance for pricing options. It uses partial…

Q: mpute the (1) het present value, (2) pro lity Index, and ternal rate of retur option. (Hint: To…

A: Capital budgeting concepts and tools will have to be used in this case. The first task will be to…

Q: A call option that is Multiple Choice in the money out of the money has a positive intrinsic value…

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Q: Consider the model of Black and Scholes. Consider the cash=or-nothing put option V (T) = 1{S(T)<= K}…

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A: The given pay-off profile shows a downward sloping line starting above the horizontal axis at the…

Q: Explain in detail how you would extend the Cox-Ross-Rubinstein binomial tree model for pricing…

A: Solution-           The Cox-Ross-Rubinstein market model (CRR model), additionally referred to as…

Q: Is this True or False? A Put option's premium, the intrinsic value can be the following; either…

A: Intrinsic value of put option is maximum of zero or difference between strike price and market…

Q: In the context of single period binomial option pricing model with p*d = 0.75 and rf = 0.25 the…

A: Bionomial Option Pricing Model The binomial option pricing model is a method for valuing options…

Q: in the straddle option what is good to have an options with strike price equal, higher  or less than…

A: Straddle means Either Buying a Call as well as a Put Option or selling the call as well as put…

Q: Using S= $25, Put Option with Strike Price = $27, and put price = $4, draw a covered put profit…

A: Sure, a covered put involves owning the underlying asset (in this case, stock) and selling a put…

Q: Options have a unique set of terminology. Definethe following terms:(3) Strike price or exercise…

A: Option: An option is a special type of contract which gives its holder the right but not obligation…

Q: Compare the binomial and Black-Scholes option pricing models. What are their differences and…

A: The Binomial and Black-Scholes option pricing models are two widely used methods for valuing…

Q: c. In the table above, two of the options are not priced correctly, i.e., are either more expensive…

A: Step 1:Current price = $64Strike price = $59 Mispriced options:MARCH CALL:It is selling for less…

Q: Consider a chooser option that you may choose whether the option is a put (with expiration T = 2) or…

A: The chooser option refers to a type of option where the holder has the choice to convert the option…

Q: )Demonstrate how a bear and a bull spread are created using options and explain the circumstances…

A: Option strategies are pre-defined combinations of buying and selling options contracts with specific…