A 1-year European put option on a stock with strike price of $50 is quoted as $7; a 1-year European call option on the same stock with strike price $30 is quoted as $5. Suppose you long one put and short one call (one option is on 100 share).

a) Draw the payoff diagram for your put position and call position. (5 points)

b) After 1-year, stock price turns out to be $45. What is your total payoff? What is your total profit/loss?

Answer rating: 100% (QA)

a Payoff diagram for put position The payoff diagram for the put ... View the full answer