A long straddle is an investment strategy whereby at time t an investor would buy a...

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A long straddle is an investment strategy whereby at time t an investor would buy a call option C(St,t; K,T) and buy a put option P(St, t; K,T) on the same strike K using the same stock S, and having the same expiry time T (T>t). (i) (10p) Draw the payoff chart for a long position in a European straddle option. (ii) (10p-5p+5p) Based on the payoff diagram you should invest in this strategy when you anticipate an (a) increase in the underlying price, or (b) decrease in the underlying price, or (c) increase in the volatility of the underlying price, or (d) decrease in the volatility of the underlying price. Pick the best answer (5p) and explain it (5p). A long straddle is an investment strategy whereby at time t an investor would buy a call option C(St,t; K,T) and buy a put option P(St, t; K,T) on the same strike K using the same stock S, and having the same expiry time T (T>t). (i) (10p) Draw the payoff chart for a long position in a European straddle option. (ii) (10p-5p+5p) Based on the payoff diagram you should invest in this strategy when you anticipate an (a) increase in the underlying price, or (b) decrease in the underlying price, or (c) increase in the volatility of the underlying price, or (d) decrease in the volatility of the underlying price. Pick the best answer (5p) and explain it (5p).