EXTRA INFO TO HELP SOLVE:

IGNORE "CONSIDER THE FOLLOWING TRADING STRATEGIES"

() You have $10m to invest, and you are considering the returns associated with different trading strategies, having at your disposal the securities outlined in Problem ??. You are debating the risks and rewards associated with the following trading strategies: (a) Put the $10m in MSFT stock. (b) Use the $10m to buy call options with a strike of K=$25 and, for each call bought, write a call with a strike of K=$27.5. (c) Use the $10m to buy put options with a strike of K=$25 and, for each put bought, write a put with a strike of K=$22.5. Study the returns from each of these strategies, for values of MSFT's stock price ST in [20,30]( i.e. assume that MSFT stock can take on any value between $20 and $30 - doing it for integer values in this range suffices). (i) Compute the return from each strategy as a function of MSFT's stock price. Hint: yes - returns as defined as (value of the portfolio at the final date minus cost of the portfolio at the initial date)/(cost of the portfolio at the initial date). (ii) Which strategy would you deem most risky? If MSFT has a positive beta, what would be the sign of the betas of each of the strategies? Can you rank the trading strategies in terms of their expected returns in a CAPM world? () You stare at your computer screen and see that MSFT's stock is trading at S0=$24.68 (ask price) and S0=$24.65 (bid price). You also have the following information on stock option prices with MSFT as the underlying asset maturing in January. Consider the following trading strategies: (a) Buy a call option with a strike of K=$25 and short a put with a strike of K=$25. () You have $10m to invest, and you are considering the returns associated with different trading strategies, having at your disposal the securities outlined in Problem ??. You are debating the risks and rewards associated with the following trading strategies: (a) Put the $10m in MSFT stock. (b) Use the $10m to buy call options with a strike of K=$25 and, for each call bought, write a call with a strike of K=$27.5. (c) Use the $10m to buy put options with a strike of K=$25 and, for each put bought, write a put with a strike of K=$22.5. Study the returns from each of these strategies, for values of MSFT's stock price ST in [20,30]( i.e. assume that MSFT stock can take on any value between $20 and $30 - doing it for integer values in this range suffices). (i) Compute the return from each strategy as a function of MSFT's stock price. Hint: yes - returns as defined as (value of the portfolio at the final date minus cost of the portfolio at the initial date)/(cost of the portfolio at the initial date). (ii) Which strategy would you deem most risky? If MSFT has a positive beta, what would be the sign of the betas of each of the strategies? Can you rank the trading strategies in terms of their expected returns in a CAPM world? () You stare at your computer screen and see that MSFT's stock is trading at S0=$24.68 (ask price) and S0=$24.65 (bid price). You also have the following information on stock option prices with MSFT as the underlying asset maturing in January. Consider the following trading strategies: (a) Buy a call option with a strike of K=$25 and short a put with a strike of K=$25