To draw: A Payoff diagram using a butterfly spread strategy. Introduction: Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”. Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

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Answer 1

Question

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

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Students have asked these similar questions

A forward contract has an underlying asset which, in Cox-RossRubenstein notation, has S=22,u=1.2 and d=0.9. This forward contract matures in one time step and the return over this time step is R=1.02. Assuming the forward price is calculated rationally, what is the value of the forward at node (1,1)? (Give your answer as a positive number.)

Construct the payoff piecewise function from a bull spread when puts with strike prices K1 and K2, with K2 > K1, are used.

1) Using the Black and Scholes formula, for each payoff compute the price, delta and probability of being exercised: 1a) A call, K=90, So=100, T=0.25, o=0.2 and r=0.01. 1b) A put, K=37, So=35, T=0.3, o=0.3 and r=0.02. 1c) A call, K=23, So=24, T=5 months, o=24% and r=2%. 1d) A call, K=95% of So, So=50, T=9 months, o=50% and r=3%. 1e) A put, K=97% of So, So=95, T=1 year, o=D30% and r=2%. 1f) An "at-the-money" straddle, So=95, T = 3 months, o=35% and r=2%.

Answer 2

Question

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

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Answer 3

Question

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

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Answer 4

Question

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

Expert Solution & Answer

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Answer 5

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

Answer 6

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

Answer 7

Chapter 20, Problem 13PS

a.

Summary Introduction

To draw: A Payoff diagram using a butterfly spread strategy.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Butterfly Spread Strategy: It is supposed to be a neutral strategy and consists of a combination of two spreads i.e, the bull spread and a bear spread. It is a strategy that results in limited profit and limited risk options. It allows three striking prices that can be constructed using the 4 options (call and put options).

Answer 8

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

Answer 9

b.

Summary Introduction

To draw: A Payoff diagram using vertical combination and given information.

Introduction:

Net Payoff: Normally, the payoff in financial terminology refers to the amount received as returns on any investment. The amount(profit or loss) earned on sales of a product or service after deducting the selling costs and other expenses incurred during the life of the asset should also be subtracted. The remaining balance is termed as “Net Payoff”.

Vertical Strategy: It is supposed to be a strategy in which the sale and purchase of 2 options take place simultaneously. The options may have the same expiration date and different strike prices.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 20 - Prob. 1PS Ch. 20 - Prob. 2PS Ch. 20 - Prob. 3PS Ch. 20 - Prob. 4PS Ch. 20 - Prob. 5PS Ch. 20 - Prob. 6PS Ch. 20 - Prob. 7PS Ch. 20 - Prob. 8PS Ch. 20 - Prob. 9PS Ch. 20 - Prob. 10PS

Solution Summary: The author describes the butterfly spread strategy, which is supposed to be a neutral strategy that results in limited profit and limited risk options.

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Chapter 20 Solutions