In the previous problem we saw that a ratio spread can have zero initial premium. Can a bull spread or bear spread have zero initial premium? A butterfly spread? Why or why not?
Answer to relevant QuestionsConstruct an asymmetric butterfly using the 950-, 1020-, and 1050-strike options. How many of each option do you hold? Draw a profit diagram for the position. Suppose you buy theS&Rindex for $1000 and buy a 950-strike put. Construct payoff and profit diagrams for this position.Verify that you obtain the same payoff and profit diagram by investing $931.37 in zero-coupon bonds and ...If XYZ does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper? If on the other hand XYZ sells forward its expected copper production, what is its estimated profit 1 year from now? ...Suppose that firms face a 40% income tax rate on positive profits and that net losses receive no credit. (Thus, if profits are positive, after-tax income is (1− 0.4)× profit, while if there is a loss, after-tax income is ...Suppose that price and quantity are positively correlated as in this table: There is a 50% chance of either price. The futures price is $2.50. Demonstrate the effect of hedging if we do the following: a. Short the expected ...
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