Consider the following table of Call/Put premia for maturity T = 1 year: Strike Call Premium...

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Consider the following table of Call/Put premia for maturity T = 1 year: Strike Call Premium Put Premium 95 100 105 6.49 3.76 1.94 1.78 3.76 6.65 The current asset price is So = 96 and the continuously compounded interest rate is r = 0.06. You purchase 1 share today, so that you're now long the stock. Draw the profit diagram at T = 1 if in addition to being long the stock you buy a Put option with strike K = 95. On the same diagram, plot the profit if you instead buy a Put option with strike K= 100. Draw the profit diagram at T = 1 if in addition to being long the stock you sell a Call option with strike K = 105 (no Puts anymore). On the same diagram, plot the profit if you instead sell a Call option with strike K = 100. Let us assume that the stock price after 1 year has a Uniform distribution in the range [75, 125]. [This is not a very realistic assumption, but makes the computation much easier]. Compute the expected profit for each of the 4 strategies described above, as well as for the unhedged strategy of simply being long the stock. Which strategy yields the highest average profit? Hint: since the underlying random variable is uniform, the expected profit is simply the average of your profit diagram in the range indicated, proportional to the area under the curve. . Which of the above 5 strategies has the lowest variance of profit? Variance is one way to quantify risk (higher variance = more risky). Consider the following table of Call/Put premia for maturity T = 1 year: Strike Call Premium Put Premium 95 100 105 6.49 3.76 1.94 1.78 3.76 6.65 The current asset price is So = 96 and the continuously compounded interest rate is r = 0.06. You purchase 1 share today, so that you're now long the stock. Draw the profit diagram at T = 1 if in addition to being long the stock you buy a Put option with strike K = 95. On the same diagram, plot the profit if you instead buy a Put option with strike K= 100. Draw the profit diagram at T = 1 if in addition to being long the stock you sell a Call option with strike K = 105 (no Puts anymore). On the same diagram, plot the profit if you instead sell a Call option with strike K = 100. Let us assume that the stock price after 1 year has a Uniform distribution in the range [75, 125]. [This is not a very realistic assumption, but makes the computation much easier]. Compute the expected profit for each of the 4 strategies described above, as well as for the unhedged strategy of simply being long the stock. Which strategy yields the highest average profit? Hint: since the underlying random variable is uniform, the expected profit is simply the average of your profit diagram in the range indicated, proportional to the area under the curve. . Which of the above 5 strategies has the lowest variance of profit? Variance is one way to quantify risk (higher variance = more risky).

Answer rating: 100% (QA)

To answer your query lets go through each part step by step 1 Draw the profit diagram at T1 for long stock with a Put option K95 and Put option K100 To draw the profit diagram we need to calculate the ... View the full answer