# The price of a stock is \$40. T

1. The price of a stock is \$40. Theprice of a one-year European put option on the stock with a strikeprice of \$30 is quoted as \$7 and the price of a one-year Europeancall option on the stock with a strike price of \$50 is quoted as\$5. Suppose that an investor buys 100 shares, shorts 100 calloptions, and buys 100 put options.

1. Construct a payoff and profit/loss table

Solution:

Current price = \$40

Call option: Strike price = 50 and premium = 5

Put option: Strike price = 30 and premium = 7

Payoff of stock = Spot price – Purchase price = Spot price-40

Payoff of short call option = MIN (Spot price – Strike Price, 0)+ Premium

Payoff of long put option = MAX (Strike Price – Spot Price, 0) -Premium

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