Problem:
The current market price of an asset is and it can be bought or sold for that price. A call option is available on the asset for and a put option is available for a price of . Both options have an exercise price of .
Required:
Question 1: Prepare a payoff schedule for a "straddle" using prices of . Explain the rationale behind this strategy. Note: A "straddle" consists of buying one call and one put on the same asset with the same X.
Question 2: Prepare a payoff schedule for writing a call and writing a put using the same data as in part a. What does this resemble?
Question 3: What are the rationales behind these strategies?
Note: Provide support for your rationale.