You buy two January 2023 expiration call option on XYZ with an exercise price of $100 for $2 each. You also buy one January 2023 put option on XYZ with an exercise price of $95 for $1.50. a) This position is called a strap. Graph the payoff and profit of this portfolio as a function of XYZ's price in January 2023 (PT) b) At what two stock prices will you just break even on this investment? c) What bet are you taking by establishing this position? When do you profit? When do you lose? d) What is your return if the price of XYZ is $110 at expiration? e) What is your return in the price of XYZ is $85.5 at expiration?
You buy two January 2023 expiration call option on XYZ with an exercise price of $100 for $2 each. You also buy one January 2023 put option on XYZ with an exercise price of $95 for $1.50. a) This position is called a strap. Graph the payoff and profit of this portfolio as a function of XYZ's price in January 2023 (PT) b) At what two stock prices will you just break even on this investment? c) What bet are you taking by establishing this position? When do you profit? When do you lose? d) What is your return if the price of XYZ is $110 at expiration? e) What is your return in the price of XYZ is $85.5 at expiration?
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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Transcribed Image Text:You buy two January 2023 expiration call option
on XYZ with an exercise price of $100 for $2
each. You also buy one January 2023 put option
on XYZ with an exercise price of $95 for $1.50.
a) This position is called a strap. Graph the payoff
and profit of this portfolio as a
function of XYZ's price in January 2023 (PT)
b) At what two stock prices will you just break
even on this investment?
c) What bet are you taking by establishing this
position? When do you profit? When do
you lose?
d) What is your return if the price of XYZ is $110
at expiration?
e) What is your return in the price of XYZ is $85.5
at expiration?
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