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Question: Consider the following comment dealing with options written on the eurodollar exchange rate: Some traders, thinking that implied volatility was too high entered new trades. One example was to sell one-year in-the-money euro Puts with strikes around USD1.10 and buy one-year at-the-money euro Puts. If the euro is above USD1.10 at maturity, the trader makes the difference in the premiums. The trades were put on across the curve. (Based on an article in Derivatives Week (now part of Global Capital)).
a. Draw the profit/loss diagrams of this position at expiration for each option separately.
b. What would be the gross payoff at expiry?
c. What would be the net payoff at expiry?
d. Why would the traders buy "volatility" given that they buy and sell options? Don't these two cancel each other in terms of volatility exposure?
Choose one financial topic (i.e., Stocks, Bonds, US Economy, Oil, China Economy, Interest Rates, Foreign Currencies, Japan Economy, Precious Metals, European Economy, etc.) and answer the following questions:
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A good stock-based mutual fund should earn at least 10% per year over a long period of time. Consider the case of Barney and Lynn, who were overheard gloating.
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Tally Ho Inn has annual sales of $737,000. Earnings before interest and taxes is equal to 21 percent of sales. For the period, the firm paid $7,900 in interest. What is the profit margin if the tax rate is 35 percent?
Jack Hammer that invests in a stock that will pay dividends of $2.00 at end of 1st year; $2.20 at the end of 2nd year: and $2.40 at the end of the third year.
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