Consider a Ratio Spread Comprising a Call at Strike $K _ { 1 }$

question 4

Multiple Choice

Consider a ratio spread comprising a call at strike $K _ { 1 }$ and short two calls at strike $K _ { 2 } > K _ { 1 }$ .The current stock price is at $K _ { 1 }$ .The market view for this trade is most likely to be:

• A)That the stock is more likely to fall in price than rise in price.
• B)That volatility of the stock is likely to rise.
• C)That the stock is likely to experience high levels of positive skewness in returns.
• D)That the stock will rise but not by an indefinite amount.

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Definitions:

Diversification

A risk management strategy that involves spreading investments across various financial instruments, industries, or other categories to reduce exposure to any single asset or risk.

Risk-Averse Investors

Investors who prioritize minimizing risk over maximizing returns, often choosing safer, lower-yield investments.

Uncertainty

The state of having limited knowledge where it is impossible to exactly describe the existing state, a future outcome, or more than one possible outcome.

Negatively Correlated

A relationship between two variables in which one variable increases as the other decreases.