Week 10 Individual Assignment Problem 2015
Question # 00076381
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Updated on: 06/18/2015 02:49 AM Due on: 06/18/2015
For example, suppose a stock is selling for $61 and there are three-month call options at $57, $60, and $63. The prices of the options are $6, $3, and $1, respectively.
a) The investor expects the price of the stock to be stable. What would the investor gain or lose at the option ‘expiration from constructing an appropriate butterfly spread at the following prices of the stock: $50, $55, $57, $63, $65, and $70?
b) What is the maximum possible loss?
c) What is the maximum possible gain?
d) What is the range of stock prices that produces a gain from constructing this butterfly?
e) Did the butterfly achieve its objective based on the expectation that the price of the stock would be stable?
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Solution: Week 10 Individual Assignment Problem 2015 Solution