I need help on question #4 since I already did question #3.

Thanks!

9:33 PM Thu Feb 6 Problem-Set-2-Spring-2020.pdf Econ 136: Financial Economics Problem Set #2 Due Date: February 7, 2020 General Instructions: Please upload a PDF of your problem set to Gradescope by 11:00 pm. Late homework will not be accepted. Please put your name and student ID number at the top of the first page. 1. Given your reading of the 2016 Reuters article U.S. airlines rethink hedges as oil plunges: (a) In their hedges were the carriers long or short forward contracts to buy oil? Briefly explain. (b) An economic agent who is long (short) a forward can exit the hedge associated with that forward before the delivery month by entering into a short (long) posi- tion in the same forward. The simultaneous long and short forwards will cancel and the economic agent will be left with any gain or loss based on the difference in the commitment price of the two forwards. Use this to explain why the carriers lost money when they exited their hedges. (c) American Airlines Group is described in the article as a "big winner" because it has not hedged fuel at all." If airlines cannot predict the future direction of oil prices was American Airlines Group smart or lucky? Briefly explain and include an assessment of how American Airlines Group would have been described in this article if oil prices had increased. 2. What is the Contract Unit (i.e., the quantity) of a CME Group RBOB Gasoline Futures contract? 3. Draw the payoff diagram for the following position: (i) long one 40-strike put, (ii) short one 35-strike put, (iii) short one 25-strike put, and (iv) long one 20-strike put. Assume all options have the same underlying and the same time to expiration. Be sure to label the axes of your graph. Briefly explain how these options combine to form the payoff diagram that you drew. 4. Replicate the payoff diagram you drew in question 3 with a portfolio of butterfly positions with 5-point spacing (e.g., a butterfly centered on 20 would involve options with strikes of 15, 20, and 25, while a butterfly centered on 40 would involve options with strikes of 35, 40, and 45). Indicate the number and center strike prices for the butterfly trades needed for this replication. Dashboard Calendar 1 To Do Notifications Inbox