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Explanation:
A bull spread is a strategy that benefits from an increase in the underlying asset price.
Two standard constructions are:
With strikes 28 and 32:
Therefore, the correct choice is C.
Q-727.1. Assume the current price of a stock is $30.00 and imagine that we can only trade the following four options at two strike prices:
$28.00, we can employ either a call or a put, where c(K=28.00) = $3.98 and p(K=28.00) = $1.46$32.00, we can employ either a call or a put, where c(K=32.00) = $2.05 and p(K=32.00) = $3.46Each of these prices is approximately accurate for a six-month option when the volatility is 31.2% (but these details are not necessary to answering the question). If we want to implement a bull spread, how could we do that?
A
We cannot create a bull spread with these options
B
Long the call with strike of 32.00 plus Short the put with strike of 28.00
C
Long the call with strike of 28.00 plus Short the call with strike of 32.00; or Long the put with strike of 28.00 plus Short the put with strike of 32.00
D
Long the call with strike of 32.00 plus Short the call with strike of 28.00; or Short the put with strike of 28.00 plus Long the put with strike of 32.00
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