Assignment:
Question
Current stock price S is $22. Time to maturity T is six months. Continuously compounded, risk-free interest rate r is 5 percent per annum. European options prices are given in the following table:
(a) What is the aim of a long (or bottom) straddle strategy? Create a long straddle by buying a call and put with strike price K3=$22.50
(b) What is the aim of a short (or top) strangle strategy? Create a short strangle by writing a call with strike price K3=$22.50 and a put with strike price K2=$20.
|
Strike Price
|
Call Price
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Put Price
|
|
K1=$17.50
|
$5.00
|
$0.05
|
|
K2=$20.00
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$3.00
|
$0.75
|
|
K3=$22.50
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$1.75
|
$1.75
|
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K4=$25.00
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$0.75
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$3.50
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