Question 3: Option Pricing and Option Strategy (10 marks) a) You are attempting to formulate an investment strategy. In particular, you short a put option with strike price X1 equals to $95, and you long another put option with strike price X2 equals to $115. Both put options have the same underlying stock and will expire at time T. (4.5 marks) Pls plot the payoff structure of this investment strategy as a function of St, which stands for the price of underlying stock at maturity. The X-axis is ST, and Y-axis is the total payoff. (Hint: you can first calculate the total payoff in three scenarios: Sy 115.] b) given the following information: stock price right now So = $100; X1 = $95, X2 = $115, annualized risk free rate at 2%: volatility of the stock o = 0.18; T equals to 5 years. The stock has a policy of not paying out any dividends. Based on these information, calculate the cost of establishing the above investment strategy based on the Black-Sholes model. (5.5 marks) Question 3: Option Pricing and Option Strategy (10 marks) a) You are attempting to formulate an investment strategy. In particular, you short a put option with strike price X1 equals to $95, and you long another put option with strike price X2 equals to $115. Both put options have the same underlying stock and will expire at time T. (4.5 marks) Pls plot the payoff structure of this investment strategy as a function of St, which stands for the price of underlying stock at maturity. The X-axis is ST, and Y-axis is the total payoff. (Hint: you can first calculate the total payoff in three scenarios: Sy 115.] b) given the following information: stock price right now So = $100; X1 = $95, X2 = $115, annualized risk free rate at 2%: volatility of the stock o = 0.18; T equals to 5 years. The stock has a policy of not paying out any dividends. Based on these information, calculate the cost of establishing the above investment strategy based on the Black-Sholes model. (5.5 marks)