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[solution] » 1.  (25 points) The current market price of an asset is  and it can be bought or so


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1.  (25 points)

The current market price of an asset is  and it can be bought or sold for that price.  A call option is available on the asset for  and a put option is available for a price of .  Both options have an exercise price of .

a.  Prepare a payoff schedule for a ?straddle? using prices of .  Explain the rationale behind this strategy.  Note:  A ?straddle? consists of buying one call and one put on the same asset with the same X.(10 points)

b.  Prepare a payoff schedule for writing a call and writing a put using the same data as in part a. What does this resemble?  (10 points)

c.  What are the rationales behind these strategies?  (5 points)
2.  (25 points)

The current market price of an asset is  and it can be bought or sold for that price.  A call option is available on the asset for  and a put option is available for a price of .  Both options have an exercise price of .

a.  (12 points)    

(i)         Suppose you buy only the asset for $40.  Show your payoff using prices of . (5 points)

Show how you can hedge against losses using either the call or put option. (7 points)

b.  (12 points)    

(i)         Suppose you sell only the asset for $40.  Show your payoff using prices of . (6 points)

(ii)        Show how you can hedge against losses using either the call or put option. (7 points)


3.  (25 points)

How can leverage be used to increase returns?  Describe in the context of the capital allocation line and margin trading.  If the returns have increased, what has happened to returns?

if someone can help me solve these 4 problems

 


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[solution] » 1.  (25 points) The current market price of an asset is  and it can be bought or so.zip

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