Question
The price of a stock is $40. The price of one-year European put option on the stock with a strike price of $30 is quoted
The price of a stock is $40. The price of one-year European put option on the stock with a strike price of $30 is quoted at $7 and the price of a Euro- pean call option on the stock with a strike price of $50 is quoted as $5. Suppose that an investor buys 10 shares, shorts 10 call options and buys 10 put options. Construct a table and draw a diagram illustrating how the investor's profit or loss varies with the stock price over the next. What are the maximum gain, maximum loss, and break even point from this trade? How does your answer change if the investor buys 10 shares, shorts 20 call options and buys 20 put options? Why would an investor want to enter into this trade?
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