(a) Ratio spread consists of an unequal number of options at different strike prices are purchased...

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(a) Ratio spread consists of an unequal number of options at different strike prices are purchased and written. For example, a put ratio spread can be created by buying at-the- money put option with strike price of K with premium P, while also writing two put options that are further out-of-the-money with strike price K2 with premium P2, both with the same expiration date, T. Continuously compounded interest rate is given by r. Determine the payoff and profit function of the put ratio spread and construct the tables for payoff and profit for spot prices ST Suppose a non-dividend paying stock is currently worth $100 and the market prices of six- month European options are as follows: Premium Strike price 100 110 Call Put 10.35 7.00 6.11 11.23 Assume that the 6-month effective interest rate is 4%. (a) Given that both put option premiums are mispriced, calculate how much their prices should be using put-call parity. (b) An investor wishes to take advantage of the mispriced premiums by creating a box spread. (i) Determine the investor's strategy to create the spread and to exploit the arbitrage opportunities from the above options. (a) Ratio spread consists of an unequal number of options at different strike prices are purchased and written. For example, a put ratio spread can be created by buying at-the- money put option with strike price of K with premium P, while also writing two put options that are further out-of-the-money with strike price K2 with premium P2, both with the same expiration date, T. Continuously compounded interest rate is given by r. Determine the payoff and profit function of the put ratio spread and construct the tables for payoff and profit for spot prices ST Suppose a non-dividend paying stock is currently worth $100 and the market prices of six- month European options are as follows: Premium Strike price 100 110 Call Put 10.35 7.00 6.11 11.23 Assume that the 6-month effective interest rate is 4%. (a) Given that both put option premiums are mispriced, calculate how much their prices should be using put-call parity. (b) An investor wishes to take advantage of the mispriced premiums by creating a box spread. (i) Determine the investor's strategy to create the spread and to exploit the arbitrage opportunities from the above options.