Question
Linda is a portfolio manager in the U.S. The U.S. has bid to be the host country for a major international sports tournament. The host
Linda is a portfolio manager in the U.S. The U.S. has bid to be the host country for a major international sports tournament. The host country will be announced in three weeks. Linda believes that the share price of Sunnyside Hospitality, a hotel operating company, will be significantly influenced by the outcome of the bid to host the tournament. If the U.S. is selected, she believes that Sunnyside's share price would rise significantly. If the U.S. is not selected, she believes that Sunnyside's share price would fall significantly. Linda wants to profit from her beliefs by implementing a straddle strategy using options. She gathers the information shown in Exhibit 1.
Exhibit 1:Sunnyside Hospitality Share and Options Data
Current share price of Sunnyside Hospitality:US$ 8.80
Price of one month call option, exercise price US$ 9.00:US$ 0.38
Price of one month put option, exercise price US$ 9.00:US$ 0.57
Briefly Explain why each of the following option strategies is less appropriate than a straddle strategy, given Linda's beliefs:
(a) Bull spread using calls
(b) Long butterfly spread
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