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Currently, European call options on Sunvalley stock with an exercise price of $40 and a time to maturity of 7 months are trading at
Currently, European call options on Sunvalley stock with an exercise price of $40 and a time to maturity of 7 months are trading at $2.10. European put options with the same exercise price and time to maturity are trading at $9.00. Assume that one option give the right to purchase or sell one stock. Suppose your broker suggests the following investment strategy: Write one Sunvalley call option and buy one Sunvalley put option (both with an exercise price of $40 and a time to maturity of 7 months). 25. What would be the payoff diagram for the short call option? Payoff ST b) Payoff Payoff H d) Payoff S Profit 26. What would be the payoff diagram of your broker's option strategy? Payoff Payoff d) S St K-x K+x b) Payoff Payoff S St 27. What would be the maximum gain of your broker's option strategy? a) $0 b) $33.1 c) -$7.1 Payoff d) $40.0 e) Unlimited gain 28. What would be the maximum loss of your broker's option strategy? A positive number means a) This strategy would also yield a gain b) $0 c) $11.1 d) $40 e) Unlimited loss 29. Does the payoff diagram of your broker's strategy look familiar? What is it most similar to? a) A long position in Sunvalley stock b) A short position in Sunvalley stock c) A short call d) A covered put e) A straddle
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