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Calculate the maximum profit and loss for an investor

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Reference no: EM132989260

Question - The price of a stock is currently $20. A three-month at-the-money call option on the stock is trading at $1.25. The risk-free rate is 4.0%. Calculate the maximum profit and loss for an investor who buys a straddle.

a. The maximum loss is $1.25 whereas the maximum profit is $17.70.

b. The maximum loss is $0.8 whereas the maximum profit is $9.90.

c. The maximum loss is $2.30 whereas the profit is unlimited.

d. There is no loss on the strategy and an unlimited upward potential.

Reference no: EM132989260

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