1. Two call options with strikes K1 and K2 with K1 < K2 are trading at prices c2 > c1. Explain why this is not intuitively reasonable.
2. Explain what securities I need to buy or sell to create a portfolio payoff that equals |ST − K1| − |ST − K2| where K1 and K2 are strike prices (the symbol |.| means absolute value).
3. You buy an ATM straddle on a stock that is trading at 100. You pay $5 for the straddle. How much does the stock need to go up or down before you break even on the trade?
4. A currency board
a. Does little to stabilize a currency's value.
b. Is worth considering only if the government can convince investors that the exchange rate will be maintained.
c. May reduce fears that the local currency will weaken even if the currency board is expected to remain in place for only a few weeks.
d. All of these choices are correct.