1. We used the basic equation of S + P = B + C in class to show that we could create the payoff of B from the other three variables. Show how the equation can be used to solve for the payoffs of the other three variables. Make sure to utilize payoff diagrams.
2. Go out to Yahoo! Finance and find a stock that has options traded on it. Look for pairs of puts and calls with the same exercise price that are as close to at the money as possible. From this market data, create the following investment strategies: 1) straddle, 2) strangle, 3) strap, and 4) strip. Derive the profits from these strategies over possible stock prices. Draw the payoff diagram for each strategy.