An investor started a calendar spread in November 2020 with a short position in 1-year European put and a long position in 2-year European put. Both puts are on the same non-dividend-paying stock and have the strike price of $100. At that time, the price of 1-year put was $7 and the price of 2-year put was $10. One year has passed, and the investor is now about to close all of the positions. The current stock price is $90 and the risk-free interest rate is 3% per annum. What is the smallest and largest possible profit from this calendar spread? (Hint: Consider the lower/upper bound for the put price.)

Answer rating: 100% (QA)

The profit from a calendar spread can be calculated as the difference between the payoff from the lo... View the full answer