Suppose that the following options are available

Option	Expiry	Strike	Price
Put	0.75 years	100	9
Call	0.75 years	100	5

i) If an investor believes that, by the options’ expiry, the underlying asset’s price will be substantially different from the strike value, with equal likelihood of it being as far above as below, then construct a portfolio consisting of positions in these two options that will take advantage of the situation.

(ii) Determine the maximum profit and the maximum loss that results from the position above, plot a profit and loss diagram and clearly indicate the range of the terminal stock price that results in a profit for the investor.

Answer rating: 100% (QA)

Answer i The investor can construct a portfolio consisting of positions in these two options that will take advantage of the situation by buying one c... View the full answer