Suppose that the standard deviation on ABC stock is 0.5, that the price of ABC stock is $100, and that ABC doesn’t pay dividends. The risk-free interest rate is 1.67%.
(a) Calculate the price of a long straddle with exercise price $110 which expires one year from now.
(b) Plot the payoffs and profits of the straddle. Make sure you show numerically what the vertical distance between the payoff and the profits is.
(c) What are the break-even points of the straddle?