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Draw a diagram showing the pay-off at maturity

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Problem 11Long 1 XYZ 40 Call with a premium of $3.00 and short 1 XYZ 42 Call with a premium of $2.00

An investor is considering the following option strategy:

a) Name the strategy and draw a diagram showing the pay-off at maturity. For what range of stock prices would this strategy lead to a profit/loss? Calculate max. profit/loss.

b) Under what assumptions would an investor employ this strategy. Will it help managing risk?

Reference no: EM132602473

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