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Consider a certain butterfly spread on American International Group stock (AIG): this is a portfolio that is long one call at $50, long one call at $70, and short 2 calls at $60. Assume expiration of all options is at the same time t = T.

(a) Graph the payoff of this portfolio at expiration T as a function of the stock price ST of AIG.

(b) If today the calls cost $13.10, $5.00, and $1.00 for the strikes at 50, 60, and 70, respectively, what will be the profit or loss (PnL) from buying this spread if the stock turns out to be trading at $55 at time T? at $35? Assume the risk-free rate is 0%.

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Financial Management, Finance

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