Assignment
A call with a strike price of $100 costs $6. A put with a strike price of 90 and the same maturity costs $4. Both will mature in three months. A trader buys both the call and the put simultaneously.
1. Present the profit/loss at maturity from this strategy in the following table.
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Stock Price at Maturity, ST
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ST< 90
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90£ ST£ 100
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ST> 100
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1
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Payoff from the call (excluding premium)
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2
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Payoff from the put (excluding premium)
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3
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Net profit (including premium)
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2. Draw a diagram to show the variation of the profit with the stock price at maturity.
3. For what range of stock prices would the strategy lead to a profit? Explain when the trader should use this strategy.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.