\documentclass[a4paper,12pt]{article}
\usepackage{epsfig}
\begin{document}
\parindent=0pt
\textbf{Question}
In the question YOU MAY ASSUME
\begin{description}
\item{(i)}
that all Calls and Puts are of European type,
\item{(ii)}
that (whether bought long or short) all Calls may be purchased for a
constant value $C$ and all Puts may be purchased for a constant value
$P$,
\item{(iii)}
that all calculations are to be made from the point of view of the
holder of the option (rather than that of the writer).
\end{description}
\begin{description}
%Question 2a
\item{(a)}
A STRADDLE is an option strategy that consists of a position where one
is a long one Call and long one Put, both with same strike $E$ and
expiry $T$. At expiry the underlying has a value $S(T)$. What
conditions must $S(T)$ satisfy in order for a straddle to be
profitable?
Draw a profit diagram for a straddle, plotting the profit at expiry
against $S(T)$. If an investor buys a straddle, what view is she or he
taking of the likely behaviour of the underlying?
%Question 2b
\item{(b)}
A BUTTERFLY SPREAD is an option strategy that consists of a position
where one is long one Call with a strike $E-K$, long one call with a
strike $E+K$ and short two calls, both with strike $E$, where the
constant $K$ satisfies $4C)$$
There are two cases:
\begin{description}
\item{(i)} $S>E$ in which case profit$=S_E+0-C-P$ and so for
profit$>0$ we need $S>E+C+P$
\item{(ii)} $S0$ we need $SE+C+P \ \ \ \rm{OR} \ \ \ S0 & \Rightarrow & S>4C+E-K \ \ \ \rm{or}\\
-S+E+K-4C>0 & \Rightarrow & S< -4C+E+K\\
\rm{i.e.} E-K+4C < & S & < E + K -4C
\end{eqnarray*}
\begin{center}
\epsfig{file=448-1999-2.eps, width=100mm}
\end{center}
(Again, need all labels for full marks)
An investor buys a butterfly spread if she or he considers that
changes in the price of the underlying will be small.
\end{description}
\end{document}