(Solved): 2. Payoff Diagrams: I (a) Sketch the graph of the payoff diagram for the following portfolio: short ...

2. Payoff Diagrams: I (a) Sketch the graph of the payoff diagram for the following portfolio: short one share, short four European put options with exercise price E?. and long three European call options with exercise price E2, in the case that E? < E?. [3 marks] (b) A trader predicts that the share price S in six months time will be S(T) = £10 and wishes to make a profit on this knowledge. They can buy (or sell) the following call options:- a call option with exercise price £5 has a market price of £10; a call option with exercise price £10 has a market price of £4; a call option with exercise price £15 has a market price of £2; and can spend at most £4 setting up the portfolio. The trader does not want to risk large losses so the payoff (for the options held in the portfolio) should be greater than or equal to zero. State the final portfolio and explain your choice, then sketch the resulting payoff diagram.