Problem bank

Problem 203 of 333MediumFinanceP203

Price and breakevens of an ATM straddle

  1. A stock is at 100. Assume r=0r = 0 and that at expiry ST∼N(100,102)S_T \sim N(100, 10^2). Price the at-the-money straddle (one call and one put, both struck at 100). Where are the breakevens, and what is the probability that buying the straddle at its fair price makes money?