Explanation:
Bull spread + bear spread = box spread
The payoff of a box spread is always the difference in strikes, regardless of the final value of the underlying.
The no-arbitrage price of a box spread is given by the payoff discounted at the risk-free rate:
(\`60 - \50`) / (1.04)^{0.5} = \`9.80`$
(Book 3, Module 40.2, LO 40.c)
Question 35
An options trader is particularly active in trading bull and bear spreads. Indeed, for this particular trade, he has decided to offset a bull spread against a bear spread. He has set up the following position in six-month European options written on Zing, Inc., at a time when the stock price is $55 and interest rates are 4%:
| Type of Option | Exercise Price |
|---|---|
| Long call | $50 |
| Short call | $60 |
| Long put | $60 |
| Short put | $50 |
The no-arbitrage price of this position is closest to:
A
$0.00.
B
$9.60.
C
$9.80.
D
$10.00.
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