Compare the payoff patterns of two options

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It is shown in the above table that the put option has a negative expected return of -16.67%. The negative return is due to the price ($120) investors would pay for this option when the expected payoff is $100. Remember the call option's expected return is 42.86%. This high expected return is due to the low price of $70.

Why do you think the put option has a negative expected return (-16.67%), while the call option has a very high positive expected return (42.86%)?

Compare the payoff patterns of these two options. When do they pay? Note that one pays when the economy is good, and the other pays when the economy is bad.

Reference no: EM132618354

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