1.Write a short paper discussing each of the option pricing models and discussing the benefits and limitations of each model. Conclude with an explanation of which model represents the preferred model and/or whether each model should be used for specific types of options in specific circumstances.
2.Jeff believes that Microsoft stock will move significantly in either direction with the release of the next version of Windows. Jeff wants to design a strangle strategy to take advantage of the possible move in the stock price. Jeff knows that Microsoft's call and put prices are $1 and $1.50 with strike prices of $26 and $24, respectively. The options will expire in three months and the stock is currently trading at $25.
a.Should Jeff embark on a long or short strangle strategy?
b.What is the maximum possible loss per share, gain per share, and breakeven price at the expiration of the options?
c.The delta of this call option is 0.50. What is the change in the call option price if Microsoft moves up to $28?