Assume that (B, S) is a one-dimensional financial market satisfying the NA principles. Let us consider...

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Assume that (B, S) is a one-dimensional financial market satisfying the NA principles. Let us consider put and call (options) with maturity T. For each of the following portfolios define and draw their payoffs at maturity T as a function of S: (a) Short one the risky asset and long two calls with strike price K (this combination is called a straddle); (b) Long one call and two puts, all with strike price K (strip); (c) Long one put and two calls, all with strike price K (strap); (d) Long one put with strike price K₁ and one call with strike price K₂, where K₁ > K₂ (strangle); (e) As (d) but also short one call and one put with strike price K = (K₁+K₂) (butterfly spread); (f) Long one call with strike K₁ and short one call with strike K2, consider both K₁ > K₂ and K₁ K₂ (a vertical spread). Saying: "Long" means "buy" and "short" means "sell". Assume that (B, S) is a one-dimensional financial market satisfying the NA principles. Let us consider put and call (options) with maturity T. For each of the following portfolios define and draw their payoffs at maturity T as a function of S: (a) Short one the risky asset and long two calls with strike price K (this combination is called a straddle); (b) Long one call and two puts, all with strike price K (strip); (c) Long one put and two calls, all with strike price K (strap); (d) Long one put with strike price K₁ and one call with strike price K₂, where K₁ > K₂ (strangle); (e) As (d) but also short one call and one put with strike price K = (K₁+K₂) (butterfly spread); (f) Long one call with strike K₁ and short one call with strike K2, consider both K₁ > K₂ and K₁ K₂ (a vertical spread). Saying: "Long" means "buy" and "short" means "sell".

Answer rating: 100% (QA)

Solution a Short one the risky asset and long two calls with strike price K this combination is called a straddle Payoff at maturity T maxST K 0 2maxK ST 0 This payoff is a Ushaped curve that is symme... View the full answer