Question: 6. Consider the set-up in problem 4, where the risk-free rate is 0%. (a) Use put-call parity to compute the premiums of the corresponding European

6. Consider the set-up in problem 4, where the risk-free rate is 0%.

(a) Use put-call parity to compute the premiums of the corresponding European puts, A, B, C.

(b) Graph the pay-off and profit functions for the straddle using call B and put B.

*Set-up in problem 4: Consider the three calls: option A has strike $10; option B has strike $15; and option C has strike $20, all expiring in T = 1 year. Suppose that the premium of the three options are $7, $3, $1 for A, B, and C, respectively, today (time 0). Suppose the price on the stock today is $14.

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