You bought a call option on with an exercise price of $2 and you paid $0.08/ as premium. At the same time, you sold a put on with an exercise price...

1. You bought a call option on € with an exercise price of $2 and you paid $0.08/€ as premium. At the same time, you sold a put on € with an exercise price of $2 and you received $0.10/€ as premium.

a. Please draw the combined profit graph. Show all appropriate numbers.

b. What is the name of this strategy?

c. What is the break-even point?

d. What is your profit/loss if ST = $1.97/€?

e. What is your profit/loss if ST = $1.99/€?

f. What is your profit/loss if ST = $2.10/€?

2.

a. I have a long position in a put option on € with an exercise price of $2.2/€ and a long position in a call option on € with an exercise price of $2.4/€. I paid $0.10/€ for each option. Draw the combined graph. What is the name of this strategy?

b. I have a short position in a put option on € with an exercise price of $2.2/€ and a short position in a call option on € with an exercise price of $2.4/€. I received $0.15/€ for each option. Draw the combined graph. What is the name of this strategy?

c. If I have both of these strategies together (part a and part b), how will my combined (4 options) graph look like? What is my loss/profit if ST = $1.8/€? What is my loss/profit if ST = $2.5/€?

d. Did I make a good or a bad decision when I combined both strategies? What is the advantage or disadvantage of combining these two strategies?

3. You are expecting the $/£ exchange rate to go down in the future. At the same time, you are willing to accept a small return in exchange for eliminating the risk of losing too much if the rate goes up. In other words, you want to devise a strategy that gives you a small return if the exchange rate goes down and a small loss if the rate goes up. You are considering a combination of some the following basic positions: long £, short £, long call, short call, long put, short put (all on £). What should you do?

Hint: The answer is a combination of just a few of these 6 basic positions.

4.. You have the quotations for the following positions:

 a. long or short € (current rate is $2.1/€)

b. long or short call (exercise price is $2.1/€, the premium is $0.05/€ for both long and short)

c. long or short put (exercise price is $2.1/€, the premium is $0.03/€ for both long and short)

Is there an arbitrage opportunity here? In other words, can you make a profit without taking any risk? Show me the graphs and the appropriate numbers.