Financial Risk Manager Part 1

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Explanation:

A long straddle consists of buying both a call and a put with the same strike and maturity. The maximum loss is the total premium paid.

Using put-call parity for an ATM option with $S=K=20$ , $r=4\%$ , and $T=0.25$ :

P = C + Ke^{-rT} - S = 1.25 + 20e^{-0.04\times 0.25} - 20 \approx 1.05

So the total cost of the straddle is approximately:

1.25 + 1.05 = 2.30

That is the maximum loss. A long straddle has uncapped upside because either the call or the put can gain substantially if the stock moves sharply in either direction.

Explanation:

A long straddle consists of buying both a call and a put with the same strike and maturity. The maximum loss is the total premium paid.

Using put-call parity for an ATM option with $S=K=20$ , $r=4\%$ , and $T=0.25$ :

P = C + Ke^{-rT} - S = 1.25 + 20e^{-0.04\times 0.25} - 20 \approx 1.05

So the total cost of the straddle is approximately:

1.25 + 1.05 = 2.30

That is the maximum loss. A long straddle has uncapped upside because either the call or the put can gain substantially if the stock moves sharply in either direction.

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Question 185.1. The price of a stock is currently `$20.00`. A three-month (T = 0.25 years) ATM call option on the stock with a strike at `$20.00` costs `$1.25`. The riskless rate is 4.0%. If an investor purchases a STRADDLE (i.e., bottom straddle) that includes this call option, what is the investor’s maximum risk (loss) and maximum reward (payoff) potential, respectively, without regard to time value of money?

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MManit

Last updated: April 18, 2026 at 11:32

zero (max risk) and uncapped (max reward)

50.0%

$0.80 (max risk) and $9.90 (max reward)

33.3%

$1.25 (max risk) and $17.70 (max reward)

$2.30 (max risk) and uncapped (max reward)

16.7%