Question 7: The risk reversal is a combination of a long call with strike above the current spot price, and short put with strike below current spot. Both options have the same expiry date. You are required to construct a risk reversal combination using European call and put options for a non-dividend paying stock, where the following information are given: current stock price is $50, put option with strike price K= 48 and call option with strike price K2 = 52, interest rate is 4% p.a. continuously compounded, annual volatility is 35% and time to maturity for both options is 6 months. a. Calculate the price of this risk reversal combination and compare its value with strangle created from above option. Which of those two combinations is more expensive? What is a difference between values of those two combinations? (4 marks) Construct tables presenting the profit and payoff for above risk reversal and strangle. What is the payoff function for each of those two combinations? Please analyse each combination separately. (4 marks) b. Question 7: The risk reversal is a combination of a long call with strike above the current spot price, and short put with strike below current spot. Both options have the same expiry date. You are required to construct a risk reversal combination using European call and put options for a non-dividend paying stock, where the following information are given: current stock price is $50, put option with strike price K= 48 and call option with strike price K2 = 52, interest rate is 4% p.a. continuously compounded, annual volatility is 35% and time to maturity for both options is 6 months. a. Calculate the price of this risk reversal combination and compare its value with strangle created from above option. Which of those two combinations is more expensive? What is a difference between values of those two combinations? (4 marks) Construct tables presenting the profit and payoff for above risk reversal and strangle. What is the payoff function for each of those two combinations? Please analyse each combination separately. (4 marks) b