We consider the following options strategy on ALPHABET and its total payoff at the expiry date of the short-term option.

Option | Type | Position | Remaining Life | Strike

1              Call       Short x 1          0                     700

2              Call       Long x 2         0.5                    820

3              Call       Short x 1          0                     940

For the options with a remaining life, we use the Black-Scholes-Merton (BSM) model to determine their values. We assume volatility of 30% and a risk-free rate of 4%.

a) Compute the total payoff for S = 700, 820, and 940 (2 marks)

b) Use Excel to draw the payoff pattern for prices between $500 and $1100 with a step of $10.

Answer rating: 100% (QA)

a The payoff of option 1 is 0 if the price of the stock is 700 The payoff of option 1 is 120 if the price of the stock is 820 The payoff of option 1 is 240 if the price of the stock is 940 The payoff ... View the full answer