Question: (A) An investor decides to create a Bull spread using following calls on a stock X: 5 Calls are available at strike prices of Rs.

(A) An investor decides to create a Bull spread using following calls on a stock X: 5

Calls are available at strike prices of Rs. 700 and & 750 at premium of Rs. 29.50 and Rs. 12.50 respectively. Draw a Pay off diagram and Find out

What would be the maximum risk / loss if the market turns bearish and crosses Rs. 700?
What would be the maximum reward / profit if the market crosses Rs. 750 while going up?
At what price would the break even be?

(B) American Call on an underlying non-dividend paying stock is currently trading for Rs. 15. The underlying stock price is Rs. 95, and the exercise price is Rs. 100. American Put on the same stock is also trading on the same exchange and both the options have identical terms. If annual risk free rate of interest is 5% and time to expiry for both options is one year,

a. What should be the price of the American Put for no arbitrage?

b. If the American Put were to trade at Rs. 12, is there an opportunity to make arbitrage profit? If yes, identify the appropriate arbitrage trading strategy for making arbitrage profit.

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