Draw the payoff pattern for prices

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Problem: We consider the following options strategy on ALPHABET and its total payoff at the expiry date of the short-term option.

Option Type Position Remaining Life Strike

1 Call Short x 1 0 700

2 Call Long x 2 0.5 820

3 Call Short x 1 0 940

For the options with a remaining life, we use BSM model to determine their values. We assume a volatility of 30% and a risk-free rate of 4%.

(a) Compute the total payoff for S = 700, 820 and 940.

(b) Use Excel to draw the payoff pattern for prices between $500 and $1100 with a step of $10.

Reference no: EM132473892

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