Two investors, trading with each other, construct portfolios consistent with their views about the direction of the
Question:
Two investors, trading with each other, construct portfolios consistent with their views about the direction of the price of a share. Investor 2 short-sells a share to investor 1 for £10. In addition, the following two transactions in options on the same underlying take place:
1. Investor 2 also sells investor 1 a put option with a strike price of £9.
2. Investor 2 buys from investor 1 a call option with a strike price £11. Compute in a table the total net payoff for each investor's portfolio for prices of the underlying in the range £8 to £12 (use £1 increments).
Draw the total net payoff diagrams. What can you say about the investors' views of the direction of the share price?
Intermediate Financial Management
ISBN: 978-1111530266
11th edition
Authors: Eugene F. Brigham, Phillip R. Daves