Exam (elaborations) TEST BANK FOR An Introduction to the Mathematics of Financial Derivatives 2nd Edition By Salih N. Neftci

, CHAPTER 1




1. (a) Payo diagram at expiration:
20
short stock
short call
combined position
15



10

short stock

5 written call



0



−5 short stock + short call



−10



−15



−20
0 2 4 6 8 10 12 14 16 18 20



FIGURE 0.1 Payo diagram for both a short sale of stock and an at-the-money call.




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, Payo diagram at expiration:
3.5
long put
long call
put + call
3




2.5




2




1.5




1




0.5




0
1 2 3 4 5 6 7 8 9 10



FIGURE 0.2 Payo diagram for a long put with strike K1 and a long call with strike K2 , K1 < K2 .

Payo diagram at expiration:
6
long put+short call
short put + long call
combined position

4




2
K1 K2




0




−2




−4




−6
0 2 4 6 8 10 12



FIGURE 0.3 Payo diagram for a (long put/short call) combination at K1 plus a (long call/short put) combination at K2 > K1 .




ii

, (b) Payo diagram before expiration:
10
short stock
short call
short stock combined position
5




0




−5 written call




−10
short stock + short call



−15




−20




−25
0 2 4 6 8 10 12 14 16 18 20



FIGURE 0.4 Pre-maturity payo diagram for both a short sale of stock and an at-the-money call.

Payo diagram before expiration:
4
long put
long call
put + call
3.5



3



2.5



2



1.5



1



0.5



0
0 1 2 3 4 5 6 7 8 9 10



FIGURE 0.5 Pre-maturity payo diagram for a long put with strike K1 and a long call with strike K2 , K1 < K2 .




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