Unformatted text preview: Winter 2009 PSTAT 160A Homework # 8 (Suggested) Problem 1. Graph the payoff function (as a function of the underline stock S ) of the following strategies, and indicate what view of the market does this conrespond to. All options are European, and with same maturity T . It’s quite easy if you just condidere prices above, under strikes and between strikes. 1) Buy one put with strike K (long on put) 2) Sell one put with strike K (short on put) 3) Sell one call with strike K (short on call) 4) Buy one call and one put with same strike K . 5) Buy one call at strike K 1 and sell a second one at a larger strike K 2 . 6) Buy one call at strike K 1 and sell a second one at a lower strike K 2 . 7) Buy two calls and one put with 3 different strikes (consider all possible 3 cases of which are lower or higher) Problem 2. Suppose that on a market, two commodities are traded: gas (with price S 1 ) and electricity (with price S 2 ). We consider the price variation for one time period, say time 0 and time 1. The interest rate is 0.1,)....
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- Spring '08