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A trader has the following portfolio:  Long 1-year put with strike $80  Short 1-year...

  1. A trader has the following portfolio:

    •  Long 1-year put with strike $80

    •  Short 1-year call with strike $120

    •  Long 1 share of stock.

      (Option contracts are for 1 share).

      Assume that the price of the underlying asset is $100. Volatility is 20%, rate=1%, dividend yield 0%.

    1. Calculate the value of the portfolio.

    2. What would be the maximum gain that the trader could incur in a month? Explain how.

    3. What would be the maximum loss the trader could have in 1 month? Explain.

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