A pension fund manager gives 1M to a hedge fund manager and expects the manager to yield 2% per year. The current risk-free rate is 1% per year. a. [8] The hedge fund manager is thinking of selling butterflies on the FTSE 100 index with one-month maturity. The payoff at maturity to a buyer of a butterfly is equivalent to the payoff of: long 1 call option with strike price S0-c, short 2 call options with strike price S0, long 1 call option with strike price S0+c, where S0 is the current price of the FTSE 100 index, and c is a positive constant less than S0, i.e., 0

Question 2 (23 points) A pension fund manager gives 1M to a hedge fund manager and expects the manager to yield 2% per year. The current risk-free rate is 1% per year. a. [8] The hedge fund manager is thinking of selling butterflies on the FTSE 100 index with one-month maturity. The payoff at maturity to a buyer of a butterfly is equivalent to the payoff of: long 1 call option with strike price So-c, short 2 call options with strike price So, long 1 call option with strike price So+c, where So is the current price of the FTSE 100 index, and c is a positive constant less than So, i.e., 0