Using the parameters in the header of Table 5.5, investigate the effect on the gain rate of the 80/85 spread if the volatility: becomes 30 % just after the trade is established, becomes 10 % under the same conditions. (The option prices are still determined by the stated 20 % volatility.)

Data given in Table 5.5

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Table 5.5 So $80, r = Trade sell strike/ buy strike Gain expectation for credit spreads 1%, T = 20(days), o = 80/85 calls 82.50/85 calls 82.50/87.50 calls Net Amt price at (credit) risk 1.33 0.41 3.67 2.09 0.55 4.45 80/75 puts 1.34 3.66 77.50/75 puts 2.10 0.40 77.50/72.50 puts 0.51 4.49 = 20% Simu- lation drift -0.04 -0.04 -0.04 0.08 0.08 0.08 Prob. of total loss (%) 9 9 2 8 N∞∞ 8 2 Gain Ex- prob pected (%) gain Gain rate. (%) 66 0.083 41 80 0.034 29 81 0.049 20 67 0.125 80 0.045 81 0.065 62 39 27