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The current price of a non - dividend paying stock is 4 0 and the continuously compounded risk - free rate of return is 8
The current price of a nondividend paying stock is and the continuously compounded riskfree rate of return is The following table shows call and put option premiums for threemonth European options of various exercise prices. A trader is considering two investment strategies. The first is a long strike call and long a strike put. The second is long a strike put and long a strike call. Assume one option is on one share.
Call K
Call K
Call K Put K
Put K
Put K
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a Please show the payoff and profit table and draw the diagram payoff and profit for both strategies. Assume ST is the stock price in month.
b Determine the range of stock prices in months for which the second strategy outperforms the first strategy.
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