An option strategy called the iron butterfly is illustrated in the payoff diagram below. Payoff 40...

 

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An option strategy called the iron butterfly is illustrated in the payoff diagram below. Payoff 40 Iron butterfly Type X T-t Put 45 1 Call 45 1 Put 50 1 Call 50 1 Put 55 1 Call 55 1 Premium $1.876 $9.070 50 S (a) How could you generate the iron butterfly using only call and put options? (b) How could you generate the iron butterfly using only call options and bonds? (c) The premiums of some relevant options written on S are given in the table below. Draw a profit diagram for the iron butterfly. $3.730 $6.168 $6.331 $4.013 65 60 (d) What market views could lead you to buy an iron butterfly? (e) What is the risk-free (continuously compounded) interest rate, /? (f) What is the current stock price, S;? An option strategy called the iron butterfly is illustrated in the payoff diagram below. Payoff 40 Iron butterfly Type X T-t Put 45 1 Call 45 1 Put 50 1 Call 50 1 Put 55 1 Call 55 1 Premium $1.876 $9.070 50 S (a) How could you generate the iron butterfly using only call and put options? (b) How could you generate the iron butterfly using only call options and bonds? (c) The premiums of some relevant options written on S are given in the table below. Draw a profit diagram for the iron butterfly. $3.730 $6.168 $6.331 $4.013 65 60 (d) What market views could lead you to buy an iron butterfly? (e) What is the risk-free (continuously compounded) interest rate, /? (f) What is the current stock price, S;?

Answer rating: 100% (QA)

a An iron butterfly can be generated using put and call options by ... View the full answer