Answer Happy

Excel Applications A client came to you asking for your
advice to create an option strategy that will provide the payoff
structure using certain options on Tesla’s stock. The options
should expire in 1 month.
Your task is to create a strategy that meets the client’s needs
using a combination of the options as specified in the payoff
structure .
i) Explain how your client can create the required strategy
using options (i.e., what is the mix of options you need for this
strategy).
ii) Using a five-step binomial tree approach and showing the
inputs you used in your calculation, calculate this strategy’s cost
(or net premium received). Assume the rf is 1.5% with quarterly
compounding. Refer to the CME to obtain Tesla’s implied
volatility.
iii) Draw the payoff and profit (loss) diagram.
iv) Based on the prices you calculated for the options, at what
price (or prices) of the underlying stock will the strategy
breakeven? v) What assumptions did the client make that motivates
the creation of this strategy?
FIN 361 Financial Derivatives Final Project Required Payoff Structure Version 2 The client approached you to advise him on how to create the following payoff structure using call options: 2 0 -2 W (Hint: check how the short butterfly spread is created [note: this is NOT a short butterfly spread])