Maximum potential gain and maximum loss in this strategy

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Reference no: EM13904705

The stock of the pharmaceutical company is trading at $40. There are currently two options trading: a European call option with a strike price of $45 and a European put option with the same strike price of $45. Both options have the same maturity of 1 year. Currently the interest rate is at 9.3% per year, continuously compounded. a. The call costs $3. What needs to be the price of the put? b. Suppose you want to bet that the stock price will not move much around the current stock price. Using the two put and call options available, how would you construct an option strategy to profit from your market view? Explain and describe the schedule of payoffs. What’s your maximum potential gain and maximum loss in this strategy?

Reference no: EM13904705

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