Give the name of a strategy that satisfies your requirement

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Reference no: EM132020024

Suppose that today's price of a certain security is $20 per share. You believe that the price will become lower in 3 months.

You want to purchase a combination of derivatives, which will give you a positive payoff if the price is indeed down after 3 months, but you are willing to put a $4 cap on your payoff (per share) in return for a lower price of your strategy.

Give the name of a strategy that satisfies your requirements.

Describe the derivatives that arc to be bought/sold and any relationship between their strike prices.

Draw the general payoff and P&L diagrams for your strategy.

Which of the following numbers can possibly be your cost if no arbitrage is possible: $2.50, $3.50, $4.00, $4.50? Explain.

Reference no: EM132020024

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