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A trader creates a long strangle with put options with a strike price of $90 per share, and call options with a strike of $105 per share by trading a total of 40 option contracts (buy 20 put contracts and buy 20 call contracts). Each contract is written on 100 shares of stock. The put option is worth $10.5 per share, and the call option is worth $6.5 per share. a) What is the value of the strangle at maturity as a function of the then stock price? b) What is the profit of the strangle at maturity as a function of the then stock price? Make sure to derive the exact range of then stock prices where the trade is profitable.
How to mix these two assets to create a portfolio with zero standard deviation?
The returns on asset X and the market portfolio M are related as: RX = 0.01 + 0.8Rm + 0.2? where ? is a standard normal variable and uncorrelated with Rm. The expected return on the market portfolio is 15% with a standard deviation of 20%. What is th..
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