1. An insurance company has insured oil fields in the Middle East. Next, it purchases reinsurance to manage its “tail risk.” How can the reinsurance company hedge some of itsrisks by trading derivatives?
2. Create a long straddle by buying a call @2.50 and a put @ 1.50 with strike price K3 = $22.50. The stock rises to $30. What is the gain or less?
3. What if create a long straddle by buying a call @ 2.250 and a put @1.50 with strike price K3 = $22.50. The stock rises to $23.00. What is the profit or loss?