Using the attached spreadsheet template as a model, you are going to first replicate the risk management strategy of using futures contracts to hedge aluminum prices. Next, create a risk management strategy if you had the opposite natural position in aluminum (in other words, an inflow). What would your natural position look like? What type of futures contract would hedge this risk? Finally, what would the combined payoff look like? Adjust the spreadsheet for this strategy.

Given Information: Stock Price Strike Price Call Price Put Price 25.27 25.00 1.40 0.90 Calculations: Stock Price Call Payof 20 21 22 23 24 25 26 27 28 29 30 Put Payof Lon Total Payof 12.00 10.00 8.00 Payof 6.00 4.00 2.00 - 18 20 22 Call Payof Long Straddle 12.00 10.00 8.00 6.00 4.00 2.00 - 18 20 22 24 26 28 Stock Price Call Payof Put Payof Total Payof 30 32 Given Information: Stock Price Strike Price Call Price Put Price 25.27 25.00 1.40 0.90 Calculations: Stock Price Lon Call Payof 20 1.40 21 1.40 22 1.40 23 1.40 24 1.40 25 1.40 26 0.40 27 0.60 28 1.60 29 2.60 30 3.60 Put Payof 4.10 3.10 2.10 1.10 0.10 0.90 0.90 0.90 0.90 0.90 0.90 Total Payof 2.70 1.70 0.70 0.30 1.30 2.30 1.30 0.30 0.70 1.70 2.70 5.00 4.00 3.00 2.00 Payof 1.00 -1.00 15 17 19 21 -2.00 -3.00 Call Payof Given Information: Stryker Corporation (SYK) Straddle Data from Yahoo Finance as of April 21, using the strike price of 135, http://finance Stock Price 131.01 Strike Price 135.00 Call Price 0.10 25.00 Put Price 3.00 20.00 Calculations: Stock Price Call Payof 110 3.00 115 3.00 120 3.00 125 3.00 130 3.00 135 3.00 140 2.00 145 7.00 150 12.00 Put Payof 22.00 17.00 12.00 7.00 2.00 3.00 3.00 3.00 3.00 Total Payof 19.00 14.00 9.00 4.00 1.00 6.00 1.00 4.00 9.00 15.00 10.00 Payof 5.00 - 100 -5.00 -10.00 110 -5.00 -10.00 155 160 17.00 22.00 - 3.00 3.00 14.00 19.00 What conclusions can you draw from this type of strategy in terms of upside and downside as well as when do yo Advantages Pottential profit regardless of if the asset goes up or down Unlimited profit (assuming continued movement in one direction) with limited risk Mainly volatile only one major impacts like drug trial results or or court decisions Most profit occurs close to the current stock price, making Straddles a high probability approach Disadvantages More commissions than just purchasing options If the asset price doesn't move, you would actually be better suited with a simple purchase of a call or put Time table is doubled from single option strategy Profit/Loss If the stock increases, the call option rises while the put expires If the stock decreases, the put option also rises, while the call expires If the volatility increrases, the option value can increase, while the stock stays fixed Perfect Market Neutral strategy, regardless of volatile changes, profit can be made Long Straddle 00 00 00 00 00 - 00 15 17 19 21 23 25 27 29 31 33 35 00 00 Stock Price Call Payof Put Payof Total Payof ice of 135, http://finance.yahoo.com/quote/SYK/options?strike=135&straddle=true Long Straddle 25.00 20.00 15.00 10.00 Payof 5.00 - 100 110 120 130 140 -5.00 -10.00 Stock Price Call Payof Put Payof Total Payof 150 160 170 -5.00 -10.00 Stock Price Call Payof Put Payof side as well as when do you gain and when do you lose? approach hase of a call or put Total Payof