Consider a Long Position in a 100-Strike Straddle Added to a Short

question 14

Multiple Choice

Consider a long position in a 100-strike straddle added to a short position in a 90/110-strike strangle.The underlying is a stock index.This is equivalent to:

• A)A stock index contract that pays the absolute return on the index up to \(\pm 10 \%\)
• And then pays nothing if the return is outside the range
• \(\pm 10 \%\)
• )
• B)A long position in a 90-strike straddle plus a long position in a 110-strike straddle plus a short position in a 100-strike straddle.
• C)A short position in a 90-100-110-strike butterfly call spread plus a zero-coupon bond of face value 10.
• D)A long position in a 90-100-110-strike butterfly call spread plus a long put at 90 and long call at 110.

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Definitions:

SIVs

Structured Investment Vehicles, which are investment funds that manage a portfolio of income-generating assets by borrowing in short-term markets to invest in long-term securities.

Commercial Paper

Short-term, unsecured promissory notes, issued by companies, typically used for the financing of accounts receivable, inventories, and meeting short-term liabilities.

Mortgages

Loans specifically created for purchasing real estate, secured by the property itself, which is to be repaid along with interest over a predetermined period.

Mortgage-backed CDOs

Collateralized debt obligations that are secured by mortgage-backed securities as the underlying assets.