Reference no: EM132957121

Consider a "long strangle" constructed from options which have an expiration date of Aug. 20. The following table displays the possible prices of Boeing stock on Aug. 20, as well as the payoffs accruing to someone who holds a long strangle on Boeing stock:

Probability:                               0.2                0.3              0.2              0.2                0.1
Stock price:                              $80                $90              $100            $110            $120
Gain from long straddle:            -$15                 $5                  $0               $10               -$20

Problem 1: What will it cost an investor to buy a long strangle today?

Problem 2: A long strangle is created using two options. For each option in the strangle above, indicate whether it is a put or a call, whether it is bought or sold, and calculate what its strike price is. Explain your answer.

Problem 3: Why would someone buy a long strangle? Explain carefully.

Problem 4: Discuss the differences between a short (seller) and a long (buyer) position in futures transactions. (Restrict your answer to discussion of a contract like wheat, soybeans or gold, that does not have a "cash settlement" like stock index futures do.)