The Following Prices Are Available for Call and Put Options

question 27

Multiple Choice

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 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.
Use this information to answer questions 1 through 20.Assume that each transaction consists of one contract (for 100 shares) unless otherwise indicated.
Answer questions 12 through 17 about a long straddle constructed using the June 50 options.
-Suppose the investor adds a call to the long straddle,a transaction known as a strap.What will this do to the breakeven stock prices?

• A)lower both the upside and downside breakevens
• B)raise both the upside and downside breakevens
• C)raise the upside and lower the downside breakevens
• D)lower the upside and raise the downside breakevens
• E)none of the above

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Definitions:

Required Condition

A necessary stipulation or prerequisite that must be met for a particular procedure, operation, or situation to proceed or be considered valid.

Binomial Probability

The probability of achieving a specific number of successes in a fixed number of independent Bernoulli trials, given a certain success probability in each trial.

Dependent Trials

Experiments or processes where the outcome or result of one trial influences the outcome of another.

Experiment Characteristic

A feature or quality that defines or distinguishes an experiment, often relating to its design, participants, or outcomes.