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1) A long risk reversal (RR) trade consists of a long OTM call and a short OTM put position with the same maturity. Jane is
1) A long "risk reversal" (RR) trade consists of a long OTM call and a short OTM put position with the same maturity. Jane is super bullish on stock S whose share is traded at 100. Instead of buying S share outright she entered a RR trade in which she simultaneously shorted a 6 month European put option with strike at 95 and longed a 6 month European call option with strike at 105 . The risk free interest rate is 5%. The 6 month market implied volatility at strike 95 and 105 are 35% and 32% respectively. The stock pays no dividend. Assume the market is frictionless where BSM formulas can be applied. a. How much did Jane spend to set up this RR trade? b. What is the delta of her RR position? c. What is the percentage gain/loss of Jane's trade if S in 6 month ends at 120,102,85
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