Consider a 1-year (long) strangle on the Nasdaq-100 with strikes of 4,000 and 5,000. The index spot level is 4,655 and its volatility is 20%. The risk-free rate is 4% and the index pays a dividend yield of 2%.
(a) Use a 6-step binomial tree to price this strategy (note: Up and down movements need to match the volatility. Show all the tree parameters).
b) What are the break-even point(s), the maximum profit and maximum loss of this strategy?
(c) Without using the binomial tree, what is the premium of the straddle with a 5000 strike price? Explain.