1. You buy one call contract and also buy one put contract, both with the strike price of $160. The call premium is $10 and the put premium is $9.

To keep things simple, you can assume each contract allows the holder to buy or sell one (rather than the typical 100) share of the underlying stock.

1. Compute the payoff to your option position if stock price is $140 when the options expire.

(3 points)

2. Compute the profit you made if stock price is $140 when the options expire.

(2 points)

3. What would happen to the value of your position if the volatility of returns for the underlying stock declines a day after you bought the call and the put? Please explain your answer for full credit.

(3 points)