Question
You are contacted by a high net wealth client who needs some advice upon investing in the derivatives markets, and more specifically in the options
You are contacted by a high net wealth client who needs some advice upon investing in the derivatives markets, and more specifically in the options market. You are provided the following information and requirements:
(a) A call option has a strike price of $60 and costs $3. A put option has a strike price of $50 and costs $3. Explain how a long strangle can be created from these two options. Show your workings and final profit/loss diagram.
(b) What is the maximum loss of this long strangle?
(c) As part of managing risk, would you recommend the long strangle strategy above or a long forward contract, assuming you enter the long forward at a price of $60? Clearly explain your answer.
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