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Problem 3. Here is an example of another derivative security that is constructed from the basic building blocks of call and put options. Consider a
Problem 3. Here is an example of another derivative security that is constructed from the basic building blocks of call and put options. Consider a contract that is created by the following two activities: the purchase of a put option with strike price K1 and the sale of a call option with strike price K2, where K2 > Kj. Both the call and put options are on the same underlying asset and have the same maturity date. Make a Payoff Table for this derivative security. Sketch the payoff diagram. This diagram displays the payoff as a function of S (the price of the underlying asset at maturity date). Clearly indicate Ki and K2 on the horizontal axis, and Ky on the vertical axis. Problem 3. Here is an example of another derivative security that is constructed from the basic building blocks of call and put options. Consider a contract that is created by the following two activities: the purchase of a put option with strike price K1 and the sale of a call option with strike price K2, where K2 > Kj. Both the call and put options are on the same underlying asset and have the same maturity date. Make a Payoff Table for this derivative security. Sketch the payoff diagram. This diagram displays the payoff as a function of S (the price of the underlying asset at maturity date). Clearly indicate Ki and K2 on the horizontal axis, and Ky on the vertical axis
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