Homework_4sol - 1 #1 (a): Buy call at K = 10 Sell call at K...

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1 #1 (a): Buy call at K = 10 Sell call at K = 15 Buy call at K = 18 Sell 3 calls at K = 23 Buy 2 calls at K = 28 #1 (b): We lose C (10) = 2 buying a call at K = 10 We gain C (15) = 2 . 5 writing a call at K = 15 We lose C (18) = 2 . 8 buying a call at K = 18 We gain 3 C (23) = 9 . 9 writing 3 calls at K = 23 we lose 2 C (28) = 7 . 6 buying 2 calls at K = 28 The net of this is 0, so the premium paid at time 0 to establish the above position at time 1 is 0. As a result, shift the payoff graph up buy 0 × (1 . 05) to get the profit graph, i.e. the payoff graph is the profit graph. #2: We can establish a synthetic forward with a locked-in price of 12 , 200 at time 1 by buying a call with strike price 12 , 200 and writing a put with strike price 12 , 200 (see put-call parity in the notes and synthetic forward in the Derivatives Markets text). Let C be the price of the call and P be the price of the put. Then C - P is the total premium we pay at time 0 to establish the forward. By put-call parity,
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Homework_4sol - 1 #1 (a): Buy call at K = 10 Sell call at K...

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