A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date. For a one-year straddle on a non-dividend-paying stock, you are given: o The straddle can only be exercised at the end of one year. o The payoff of the straddle is the absolute value of the difference between the strike price and the stock price at expiration date. o The stock currently sells for $60.00. o The continuously compounded risk-free interest rate is 8%. o In one year, the stock will either sell for $70.00 or $45.00. o The option has a strike price of $50.00. Calculate the current price of the straddle. (A) $0.90 (B) $4.80 (C) $9.30 (D) $14.80 (E) $15.70
A straddle is a neutral options strategy that involves simultaneously buying both a put option and a call option for the underlying security with the same strike price and the same expiration date. For a one-year straddle on a non-dividend-paying stock, you are given: o The straddle can only be exercised at the end of one year. o The payoff of the straddle is the absolute value of the difference between the strike price and the stock price at expiration date. o The stock currently sells for $60.00. o The continuously compounded risk-free interest rate is 8%. o In one year, the stock will either sell for $70.00 or $45.00. o The option has a strike price of $50.00. Calculate the current price of the straddle. (A) $0.90 (B) $4.80 (C) $9.30 (D) $14.80 (E) $15.70
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A straddle is a neutral options strategy that involves simultaneously buying both
a put option and a call option for the underlying security with the same strike
price and the same expiration date.
For a one-year straddle on a non-dividend-paying stock, you are given:
o The straddle can only be exercised at the end of one year.
o The payoff of the straddle is the absolute value of the difference between the
strike price and the stock price at expiration date.
o The stock currently sells for $60.00.
o The continuously compounded risk-free interest rate is 8%.
o In one year, the stock will either sell for $70.00 or $45.00.
o The option has a strike price of $50.00.
Calculate the current price of the straddle.
(A) $0.90
(B) $4.80
(C) $9.30
(D) $14.80
1(E) $15.70
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