Please help me solve these two questions:

Suppose you want to create a Condor Spread option strategy based on GE call options. The butterfly spread will involve the following:

• Buying a call option with strike price $23
• Selling a call option with strike price $24
• Selling a call option with strike price $25
• Buyingacalloptionwithstrikeprice$26
• You want all of these options to have the same maturity of approximately 3 months.

1. a) Go to Yahoo! Finance and search for General Electric (symbol: GE), then click on Options on the left side of the screen, then select December 18, 2015 in the dropdown box below the stock price to obtain a list of GE options with approximately three months to expiration. The Ask price is the price at which you can buy an option while the Bid price is the price at which you can sell an option. Report the bid and ask prices for each of the four call options described above. Also report the date, time, and stock price when you retrieved these options prices.
2. b)Likeinclass,providethepayofffunctionforeachrangeofstrikepricesinwhichthestockpriceincouldlandin3months.(Thestockpricecanlandinfiveranges:ST<23,2326.)
3. c) Graph the payoff of the option strategy as a function of ST.
4. d) How much will this condor spread cost? Remember to use the bid price when you sell a call option, and the ask price when you buy a call option. You receive money when you sell an option and pay money when you buy an option.
5. e) What kind of price movements are we betting on with this strategy? (no calculations needed for this question)
6. f)SupposeyoubuyaGEcalloptionthathasastrikepriceequalto$23andexpirationonDecember18,2015.Becausethestrikepriceislessthanthecurrentstockprice,thisoptionisconsideredin-the-money.Reportthestrikepriceofthiscalloption,theaskprice,andthecurrentpriceofGEstock.Supposeyouimmediatelyexercisethiscalloption.Whatisyourpayoff?Whydoyouthinkthepayoffislessthanthe(ask)priceatwhichyouboughtthisoption?
7. Question3

You are the sole bondholder in a firm that will be liquidated next year. Your main concern is that you will not be paid back the $50M you are owed at that time. The current market value of the firm is $60M, although it is unknown what the market value will be next year.

1. a) Provide the payoff diagram for the bondholder with the final market value of the firm on the x- axis.
2. b) The financial manager of the firm currently has to make one of two choices:
   • Do Nothing: under this choice, the market value of the firm will be equal to either $50M or $70M next year, with equal probability.
   • Take A Huge Risk: under this choice, the market value of the firm will be equal to either $150M or zero next year with equal probability. Assume that the bondholders and shareholders have to maintain their positions until firm liquidation next year. What is the expected payoff to bondholders and shareholders next year under each choice? If the manager is acting in the best interests of the shareholders, which choice would he make? Assume this choice is made for the rest of the problem.
3. c) The financial manager, acting in the shareholders best interests, takes the huge risk, much to the detriment of you, the bondholder. If you were to completely protect yourself against the state of the world where the firm does not pay you back, would you buy a (call or put) option on the final market value of the assets of the firm, and at what strike price?
4. d) This option you purchase has a price of $20M. You decide to borrow the $20M, in order to pay for the option, at a 10% interest rate. The loan plus interest must be repaid in one year. What is your total expected payoff (bond + option loan repayment) in one year? Would you be better off purchasing the option?

Firms that go bankrupt are typically unable to fully repay all bondholders. A bondholder can protect himself from this event by purchasing a Credit Default Swap, an agreement in which he pays a third counterparty a fee (or a sequence of fees over time) and, in exchange, the third counterparty will repay the bondholder what he is owed in the event that the firm goes bankrupt and cannot repay what the bondholder is owed (you also hand over the bond to that third counterparty). Credit Default Swaps are, in essence, the option that you purchased in part (c).