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Kruka [31]
3 years ago
11

a trader creates a long butterfly spread from options with strike prices x, y, and z, where x < y < z, and y is exactly mi

dway between x and z. a total of 400 options are traded. the difference between x and y is $13. the difference in the prices of the options with strike prices of z and y is $5.03. the difference in the prices of the options with strike prices of y and x is $6.67. what is the maximum net gain (after the cost of the options is taken into account)
Business
1 answer:
Montano1993 [528]3 years ago
3 0

Answer:

<em>$1006 </em>

Explanation:

A long butterfly is created by following these steps

  •  Long 1 call option for strike X ( highest premium say C)
  • Short 2 call option for Strike Y (premium =C-6.67 )
  •  Long 1 call option for strike Z (premium = C-6.67 - 5.03 = C-11.70 where X<Y<Z

Here, Y-X = Z-Y =$11.70

<u>i) whenever the price at maturity goes below the price of x ( no call option is executed )</u>

payoff =  2*(C-6.67) -C-(C-11.7) = - 13.34 + 11.70 = - 1.64

<u>ii) when the price at maturity is between X and Y, only call with strike X is executed </u>

hence  payoff = -1.64 +(P-X) where P is the Price at maturity

p - x = y-x = 11.70

hence maximum payoff = - 1.64 +  11.70 = $10.06

<u>iii) When the price is between Y and Z , only call with strike X and Y are executed.</u>

hence, payoff = -1.64 + (P-X)  -2* (P-Y) = -1.64 +( 2Y - X - P) and this value decreases as P increases

the minimum payoff occurs when P=Z

So, maximum payoff = -1.64 + (Z-X) - 2*(Z-Y) = -1.64 + 23.4 - 2*11.7 = -$1.64

<u>iv) When the price at maturity is more than Z , all calls are executed</u>

hence, payoff = -1.64 +(P-X) -2* (P-Y) + (P-Z) = -1.64+(2Y-X-Z)

=  -1.64+(Y-X -(Z-Y)) = -1.64+(11.7 - 11.70)

= -$1.64  

 the maximum payoff occurs when P=Y

considering the  four options  traded the maximum payoff = $10.06

<em>Finally determine the maximum net gain when 400 options are traded</em>

<em>= 10.06 * 400 / 4 </em>

<em>= 10.06 * 100 =  $1006 </em>

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Option (D) is correct.

Explanation:

Sale from beginning inventory = (Beginning inventory - sales units) × selling price per unit

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Sale from September 17th purchase:

= (Beginning inventory - sales units of Sept 5 and Sept 30) × $20

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Cost of good sold on Sept 30 = Sale from beginning inventory  + Sale from September 17th purchase

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5 0
3 years ago
Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which co
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Answer:

  1. Government Spending   
  2. Degree of Excess Capacity  
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  6. Prices of Imported Products

Explanation:

Hello, research into this question makes me believe that this is the list of factors. Hope I am right :)

  1. Government Spending  
  2. Consumer Expectations  
  3. Degree of Excess Capacity  
  4. Personal Income Tax Rates  
  5. Productivity  
  6. National Income Abroad  
  7. Business Taxes  
  8. Domestic Resource Availability  
  9. Prices of Imported Products  
  10. Profit Expectations on Investments

Supply is the amount of goods and services suppliers are willing to provide at a given time for a given price. A shift in the supply curve to the left means that there is a fall in quantity supplied (occurs during unfavorable conditions) whereas a right-hand shift proves that there is an increase in quantity supplied (occurs during favorable conditions) . Factors that can cause a shift in the supply curve are as follows:

1. Government Spending:

If the government increases spending such as in the form of loans or subsidies, suppliers will be positively affected and causes a right-hand shift in the supply curve. However, if government spending falls, it would create a left-hand shift.

2. Degree of Excess Capacity:

This refers to the stock that can be withheld in a business. When there is a lot of excess capacity, there would be a right-hand shift in supply.

3. Productivity:

Higher productivity means that production is high, hence supply is high causing a right shift. On the other hand, lower productivity will create a left-hand shift.

4. Business Taxes:

Businesses are expected to pay taxes such as corporate taxes. When taxes are high, firms are discouraged since a lot of their earnings are paid as tax to the government. Thus supply will fall, leading to a left shift. On the other hand, when taxes are low, businesses are encouraged to produce more since they can now make higher profits. Thus, supply curve shifts to the right.

5. Domestic Resource Availability:

If domestic resources are used in production, such as land, labor or machinery, high availability of these will allow higher production and hence a shift in supply to the right. Lower availability will cause a left hand shift in the supply curve.

6. Prices of Imported Products:

If certain raw materials are important for production, rising prices of imported products will reduce supply as cost of production is higher, which causes supply to shift left. However, when prices of imported products fall, cost of production falls, causing a right hand shift in the supply curve.

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