1) The current market price of an asset is S= $40 and it can be bought or sold for that price. A call option is available on the asset for C= $5 and a put option is available for a price of P= $3. Both options have an exercise price of X= $40.

a. Prepare a payoff schedule for a straddle using prices of S= 25,30,35,40,45,50,55. Explain the rationale behind this strategy. Note: A straddle consists of buying one call and one put on the same asset with the same X.

b. Prepare a payoff schedule for writing a call and writing a put using the same data as in part a. What does this resemble?

c. What are the rationales behind these strategies?