An investor bought a 70-strike European put option on an index with six months to expiration. The

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An investor bought a 70-strike European put option on an index with six months to expiration. The premium for this option was 1.

The investor also wrote an 80-strike European put option on the same index with six months to expiration. The premium for this option was 8.

The six-month interest rate is 0%.

Calculate the index price at expiration that will allow the investor to break even.

(A) 63

(B) 73

(D) 80

(E) 87

Payoff -(K - K) K K Slope = -1 S(T) Payoff K - K K Slope = -1 K2 S(T) FIGURE 3.3.2 Payoff diagram of K-K bear

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An investor bought a 70-strike European put option on an index with six months to expiration. The

Question:

Payoff -(K₂ - K₁) K₁ K₂ Slope = -1 S(T) Payoff K₂ - K₁ K₁ Slope = -1 K2 S(T) FIGURE 3.3.2 Payoff diagram of K₁-K₂ bear spreads constructed by calls (left) and by puts (right).

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B Buying a lowstrike put and selling a highstrike put the investor has ...View the full answer

Derivative Pricing

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