Explanation:
A box spread combines a bull spread and a bear spread to create a fixed payoff at expiration equal to the difference between the strikes.
Here the strikes are:
$16$24So the future payoff is:
$24 - $16 = $8Because the question asks for the present value of the future payoff, discount the payoff at the continuously compounded risk-free rate:
$8 e^{-0.04 \times 1}$$8 e^{-0.04}$$8(0.960789)7.69`**$Therefore, the correct answer is C.
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Q-184.3. The stock of ACME company is currently trading at $20.00. At a strike price of $16.00, a call option costs $6.00 and a put option costs $1.37. At a strike of $24.00, a call option costs $1.20 and a put option costs $4.26. All of the options are European with one year to expiration. The risk-free rate is 4.0% per annum continuously compounded. What is the present value (PV) of the future PAYOFF of a BOX SPREAD strategy (note: while “profit” nets the initial cost, “payoff” does not net the initial cost)?
A
Zero
B
$1.15
C
$7.69
D
$8.00
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