a$)$ Draw the payoff structure for a seagull option with the following parameters:

$-$ The hedger uses $2$ puts and $1$ call option to construct the seagull

$-$ All options have same expiry date and are for the same contract size$/$notional

$-$ The underlying asset X has a spot price of S$0.$

$-$ The hedger sells one put with a strike of K$1$ for premium P$1$

$-$ The hedger buys one call with a strike of K$2$ at a cost of P$2$

$-$ The hedger buys one put with a strike of K$3$ at a cost of P$3$

$-$ These relationships hold:

o K$3<$ S$0=$ K$1<$ K$2$

o P$1=$ P$2+$ P$3$

b$)$ Is the put you sell in part A at the money, in the money, or out of the money?

c$)$ Based on the relationships in part A$,$ how does the hedger raise funds to purchase two of the three options?

d$)$ Based on your graph in part A$,$ does the trader benefit if the price of the underlying asset X has increased or decreased at expiry? From our discussion in class, why would a trader do this in

practice?