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)
Ultimate access to all questions.
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.
No comments yet.