(a) Draw the payout profile for the following two call spread portfolios. (i) +1 K call and...
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Question:
(a) Draw the payout profile for the following two call spread portfolios.
(i) +1 K call and –1 (K + 1) call.
(ii) +2 K calls and –2 (K + 0.5) calls.
(b) By constructing a series of portfolios of call spreads and taking limits, prove that the price at time t of a digital call, with strike K∗ and payout 1, is given by
(c) Write down the equivalent formula for a digital put option in terms of put prices.
(d) By examining the payout profile, derive a put-call parity relationship for the digital call and digital put.
Related Book For
Discrete and Combinatorial Mathematics An Applied Introduction
ISBN: 978-0201726343
5th edition
Authors: Ralph P. Grimaldi
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