You are interested in a volatile situation whereby a company will either have extremegood news or bad news. It is awaiting FDA approval. The stock is currently tradingfor $75. If the company gets good news, the stock should trade up to $124. On badnews its likely to fall to $29. You purchase both a put and call (strike price is at themoney or $75). The price of the call is $24 per share and the price of the put is $18per share. Calculate the percent returns on your purchase of both. Do not calculatethe payoff for each separately, calculate the total return if the investor buys one ofeach (but in the end only 1 of the two will pay off obviously). Calculate returns forboth good news and bad news.

Please explain how to get these answers. Thank you

Answer:

Good News: Profit = $7.00; Return = 16.7%Bad News: Profit = $4.00; Return = 9.5%