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Question - Consider the three calls from the previous problem expiring in T = 1 year. Suppose that the premium of the three options are $7, $3, $1 for A, B, and C, respectively, today (time 0). Suppose the price on the stock today is $14.
(a) Which call(s) is out-of-the-money?
(b) Suppose the risk-free rate is constant at 0%. Graph the profit function for each of the previous strategies.
(c) Suppose the risk-free rate is constant at 5%. Graph the profit function for the butterfly strategy at time T taking into consideration the time value of the initial cost. By how much would the asset have to change over the year for your butterfly portfolio to be a loss?
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