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An investor bought  a share of Google for $80 on the date  of its  Initial Public Offering (IPO); simultaneously , he acquired   a  long put with strike $50 ; a long  call with strike $100 and   two short  calls with strike 120. All options are European options with 1 Year to maturity.

1. Plot the payoffs  of   a “stock and options” portfolio as a function of the stock price  a year after the IPO. 

1.           Assume that interest rate is 10% and Google’s price volatility is 45%. Calculate the cost of acquiring the   “stock and options” portfolio at the IPO date and  its payoffs a year after the IPO   if Google stock  was trading at  $400  a year after the IPO. [Use the Option Value  calculator]  


 

    • 10 years ago
    • 20
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