7) Considering a set of European Call Index Options, suppose you observe the following option prices....

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7) Considering a set of European Call Index Options, suppose you observe the following option prices. The index level today is 1,340. Option Price Туре Maturity (in days) Strike Price $33 Call 60 1310 $22 Call 60 60 1320 $11 Call 60 1330 $5 Call $3 Call $1 Call $0.5 Call 60 60 60 60 60 1340 60 1350 60 1360 60 1370 The Index dividend yield is equal to 2% continuously compounded and the RF interest rate is equal to 1% continuously compounded. Payoff 1320 1330 1310 1340 1350 1360 1370 a. How to construct a strategy that maps to the above payoff diagram? b. How much you have to pay to form such a strategy? c. What is the maximum profit that an investor can achieve per unit of this strategy? Index Level 7) Considering a set of European Call Index Options, suppose you observe the following option prices. The index level today is 1,340. Option Price Туре Maturity (in days) Strike Price $33 Call 60 1310 $22 Call 60 60 1320 $11 Call 60 1330 $5 Call $3 Call $1 Call $0.5 Call 60 60 60 60 60 1340 60 1350 60 1360 60 1370 The Index dividend yield is equal to 2% continuously compounded and the RF interest rate is equal to 1% continuously compounded. Payoff 1320 1330 1310 1340 1350 1360 1370 a. How to construct a strategy that maps to the above payoff diagram? b. How much you have to pay to form such a strategy? c. What is the maximum profit that an investor can achieve per unit of this strategy? Index Level

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Solution a To construct a strategy that maps to the above payoff diagram we can use a combination of ... View the full answer