Draw up a profit or loss table for your strategy

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Reference no: EM132180062

Question - Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. European call (put) options with maturities of one year and strike prices of $30 and $35 cost $5.60 ($2.14) and $3.28 ($4.57), respectively. You want to establish a strategy of buying the stock, shorting an out-of-the money call option, and buying an out-of-the money put option. Assume one option is for one underlying share.

(a) Draw up a profit/loss table for your strategy. Clearly show the payoff for each of the positions in your strategy.

(b) How much is the maximum profit/loss of your strategy? Also, what is the stock price at maturity that will make your strategy break-even (before any other transaction costs apart from the option premiums)?

Reference no: EM132180062

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