Assume that the risk-free interest rates are zero. Consider an asset with spot price 40. The...

 

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Assume that the risk-free interest rates are zero. Consider an asset with spot price 40. The values of the following options on this asset are given below: Option Type Strike Maturity Value Put 36 5 months $1.2 Put 42 5 months $4 Call 42 5 months $2.5 Call 44 5 months $1.8 (i) Draw the payoff diagram and the P&L diagram at maturity of a short position in a 42 straddle (i.e., of a portfolio made of short positions in a call with strike 42 and a put with strike 42). For what values of the underlying at maturity does the short straddle position make money? (ii) Draw the payoff diagram and the P&L diagram at maturity of a short position in a 36-44 strangle (i.e., of a portfolio made of short positions in a put with strike 36 and a call with strike 44). For what values of the underlying at maturity does the short strangle position make money? Assume that the risk-free interest rates are zero. Consider an asset with spot price 40. The values of the following options on this asset are given below: Option Type Strike Maturity Value Put 36 5 months $1.2 Put 42 5 months $4 Call 42 5 months $2.5 Call 44 5 months $1.8 (i) Draw the payoff diagram and the P&L diagram at maturity of a short position in a 42 straddle (i.e., of a portfolio made of short positions in a call with strike 42 and a put with strike 42). For what values of the underlying at maturity does the short straddle position make money? (ii) Draw the payoff diagram and the P&L diagram at maturity of a short position in a 36-44 strangle (i.e., of a portfolio made of short positions in a put with strike 36 and a call with strike 44). For what values of the underlying at maturity does the short strangle position make money?