Carmen constructs an options portfolio based on the BBG stock. She buys a BBG put option with exercise price $75 and buys a BBG call option with exercise price $80. Both options have the same expiration date.

a. What will be the profit/loss on this position if BBG is selling at $77 on the option expiration date? What if BBG is selling at $86? (6 marks)

b. At what two stock prices will Carmen break even on her position? (4 marks)

c. Draw the profit diagram of this portfolio at option expiration as a function of BBG stock price at that time. (5 marks) d. What is Carmen expectation to justify this position? (2 marks)

Option price Exercise price Put $3.1 $75 Call $1.6 $80