The price of a stock is $40. The price of a one-year European put option on the stock with a strike price of $30 is quoted as $7 and the price of a one–year European call option on the stock with a strike price of $50 is quoted at $5. Suppose that an investor buys 1 share at $40, shorts (sells) 1 call option, and buys 1 put option. Create the table and profit graph for this position.
Create the table and profit graph for this position.
What is the maximum loss for this position?
What is the maximum profit for this position?
What are the breakeven points for this position?
What must this investor believe about the stock price in order to justify this position?