A portfolio we have talked about recently consists of (1) buying a European call on a security having exercise price E and (2) simultaneously buying a Treasury security having face E (same as exercise price of the call) and discount-to-face ratio β.  

a. What would be the payoff pattern on this portfolio?  

b.Explain how a dealer could "short" this portfolio and what the payoff pattern would be?

Answer rating: 100% (QA)

a The payoff pattern of the portfolio would depend on the price of the underlying security at expiration If the price of the underlying security is gr... View the full answer