An investor has a short position in both a call and a put options on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $35. For opening short positions an investor had received a premium of 1$ for the put option and $2 for the call option. 1) Plot the value of this combination as a function of the stock price on the exercise date without taking into account the cost of options (draw a payoff diagram for options at expiration). 2) Plot the value of this combination as a function of the stock price on the exercise date taking into account the cost of options (draw a profit diagram for the investor at expiration). 3) Explain what does the investor expect when he is forming such a portfolio.

An investor has a short position in both a call and a put options on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $35. For opening short positions an investor had received a premium of 1$ for the put option and $2 for the call option. 1) Plot the value of this combination as a function of the stock price on the exercise date without taking into account the cost of options (draw a payoff diagram for options at expiration). 2) Plot the value of this combination as a function of the stock price on the exercise date taking into account the cost of options (draw a profit diagram for the investor at expiration). 3) Explain what does the investor expect when he is forming such a portfolio.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter5: Financial Options

Section: Chapter Questions

Problem 3Q

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