Consider a certain butterfly spread on American International Group stock (AIG): this is a portfolio that is long one call at $50, long one call at S70, and short 2 calls at $60. Assume expiration of all options is at the same time t = T. (a) Graph the payoff of this portfolio at expiration T as a function of the stock price ST of AIG. (b) If today the calls cost $13.10, $5.00, and $1.00 for the strikes at 50, 60, and 70, respectively, what will be the profit or loss (PnL) from buying this spread if the stock turns out to be trading at $55 at time T? at S35? Assume the risk-free rate is 0%.
Consider a certain butterfly spread on American International Group stock (AIG): this is a portfolio that is long one call at $50, long one call at S70, and short 2 calls at $60. Assume expiration of all options is at the same time t = T. (a) Graph the payoff of this portfolio at expiration T as a function of the stock price ST of AIG. (b) If today the calls cost $13.10, $5.00, and $1.00 for the strikes at 50, 60, and 70, respectively, what will be the profit or loss (PnL) from buying this spread if the stock turns out to be trading at $55 at time T? at S35? Assume the risk-free rate is 0%.
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
Problem 1PS
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Consider a certain butterfly spread on American International Group stock (AIG): this is a portfolio that is long one call at $50, long one call at $70, and short 2 calls at $60. Assume expiration of all options s at the same timet=T. (@) Graph the payoff of this portfolio at expiration T as a function of the stock price ST of AIG. (b) If today the calls cost $13.10, $5.00, and $1.00 for the strikes at 50, 60, and 70, respectively, what will be the profit or loss (PnL) from buying this spread if the stock turns out to be trading at S5 at time T2 at $35? Assume the risk-free rate is 0%,
Transcribed Image Text:Consider a certain butterfly spread on American International Group stock (AIG): this is a portfolio that is
long one call at $50, long one call at S70, and short 2 calls at $60. Assume expiration of all options is at the
same time t = T.
(a) Graph the payoff of this portfolio at expiration T as a function of the stock price ST of AIG.
(b) If today the calls cost $13.10, $5.00, and S1.00 for the strikes at 50, 60, and 70, respectively, what will be
the profit or loss (PnL) from buying this spread if the stock turns out to be trading at $55 at time T? at $35?
Assume the risk-free rate is 0%.
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