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Question 4 (Advance Option Strategies) (6 marks) The following prices are available for call and...

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Question 4 (Advance Option Strategies) (6 marks) The following prices are available for call and put options on a stock priced at $50. The risk-free rate is 6 percent and the stock volatility is 0.35. The March options have 90 days remaining and the June options have 180 days remaining. The Black-Scholes model was used to obtain the prices. Calls Puts Strike March June March June 45 6.84 8.41 1.18 2.09 50 3.82 5.58 3.08 4.13 55 1.89 3.54 6.08 6.93 Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated. (a) (b) Construct a bull money spread using the March 45/50 calls and determine how much this spread will cost. Under what market condition does this spread strategy work well? (2 marks) Suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls. What will be the profit of this spread strategy if the stock price at expiration is $52.50? (2 marks) Suppose you wish to construct a long straddle constructed using the June 50 options. What is the profit of this strategy if the stock price at expiration is $64.75? What is the stock price range that this strategy does not work well? (2 marks) (c)

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