Question

4. In a collar trading strategy, the strike price of the put $45, and the strike price of the call is $75. The put and call premiums are $1.50 and $2.50 respectively. If the stock price at the maturity of the options is $80, what is the net payoff from the strategy? A. Loss of $4 B. Loss of $5 C. Loss of $6 D. Gain of $1 E. Gain of $2 5. For the above problem, if the stock price is at the maturity of options is $40, what is the net payoff from the strategy? A. Loss of $4 B. Loss of $5 C. Loss of $4 D. Gain of $5 E. Gain of $6

NEED HELP WITH BOTH QUESTIONS!!!!

Answer 1

1.
In collar
Buy put (Net Payoff=MAX(strike price-spot price at expiry,0)-premium)
Hold stock
Sell Call (Net Payoff=-MAX(spot price at expiry-strike price,0)+premium)

Payoff=MAX(80-75,0)+MAX(45-80,0)-1.50+2.50=1.00

Profit of 1

2.
Payoff=MAX(40-75,0)+MAX(45-40,0)-1.50+2.50=6.00

Gain of 6