What is the price of a European put if the price of the underlying common stock is $20, the exercise price is $20, the risk-free rate is 8%, the variance of the price of the underlying stock is .36 (that is, a = 6), and the option expires six months from now? 8.3
a) Graph changes in wealth, A W, vs. changes in the price of the underlying security, AS, for a portfolio where you sell one call option and sell one put option (both with the same X, T, a, andr1). Would this be a good strategy if you have inside information that leads you to expect the instantaneous variance of the underlying security will increase?
b) Graph A W against AS for a portfolio where you buy a call and sell a put. Would this be a good strategy if you expect an increase in the instantaneous variance?