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Could you please answer part b? A trader wants to set up the following strategy - known as the Googly - with options: - Buy
Could you please answer part b?
A trader wants to set up the following strategy - known as "the Googly" - with options: - Buy a call with strike 100 - Buy a put with strike 130 - Sell a put with strike 100 - Sell a call with strike 130 All the calls and puts are on the same underlying asset with expiry date exactly 3 years from today. The interest rate for both borrowing and investments is 5%, compounded annually. a) Calculate the payoff of this strategy showing all relevant steps and plot the payoff on a graph with appropriate labels. (6 marks) b) How much should it cost the trader to set up this strategy today ? Explain your reasoning. (2 marks)Step by Step Solution
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