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Payoff Diagram for one long & one short position in Call Options

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1) Portfolio 1 break-even. Draw the gross and net payoff diagrams for a portfolio which is constructed from buying one call option with a strike price $45.00 and selling one call option with a strike price of $50. The cost of the first option of $7.75 and the cost of the second option is $3.50. Using your diagram, at what stock price will you break-even (have a zero profit on your investment)? Assume the options are European and they each have a maturity of a year. SHOW ALL CALCULATIONS AND INPUTS IN EXCEL.

2) Portfolio 1 market view. In an efficient market, purchasing a security or portfolio is a zero NPV investment. This means the price of the security is equal to its value. The assumption is the investors views are the same as the market. If an investor's expectations are different than the market , then the investor's value of the portfolio will differ from the price of the portfolio. The price of the portfolio is determined by the market's expectations. For portfolio 1 to be a good investment the investor must believe which of the following?
a) The expected future stock price is higher than the market believes.
b) The expected future stock price is lower than the market believes.
c) The volatility of stock returns is higher than the market believes.
d) The volatility of stock returns is lower than the market believes.
e) None of the above

PLEASE SHOW EXPLANATION

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Solution Summary

Shows in Excel, the payoff diagram for one buy(long) and one sell (short) position in call options

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