Suppose that today's price of a certain security is $20 per share. You believe that the price will become lower in 3 months. You want to purchase a combination of derivatives, which will give you a positive payo if the price is indeed down after 3 months, but you are willing to put a $4 cap on your payo (per share) in return for a lower price of your strategy.
(a) Give the name of a strategy that satises your requirements.
(b) Describe the derivatives that are to be bought/sold and any relationship between their strike prices.
(c) Draw the general payo and P&L diagrams for your strategy.
(d) Which of the following numbers can possibly be your cost if no arbitrage is possible: $2:50, $3:50, $4:00, $4:50? Explain.