Consider the June 165, 170, and 175 call option prices in Table 9.1. a. Does convexity hold
Question:
a. Does convexity hold if you buy a butterfly spread, buying at the ask price and selling at the bid?
b. Does convexity hold if you sell a butterfly spread, buying at the ask price and selling at the bid?
c. Does convexity hold if you are a market-maker either buying or selling a butterfly, paying the bid and receiving the ask? Discuss.
Step by Step Answer:
a Since the strike prices are symmetric lambda is equal to 05 Therefore to buy a long butterfly sp...View the full answer
Related Video
A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.
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