An investor wants to purchase a portfolio consisting of long a call with exercise price E...
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An investor wants to purchase a portfolio consisting of long a call with exercise price E₁ = 190, and short a call with exercise price E₂ = 220, both to be exercised on the same date in 6 months time. The investor expects that the share price S(T) on the exercise date will be £183 with probability 0.2, £198 with probability 0.5, and £236 with probability 0.3. If the initial cost to invest in the portfolio was £12, and the risk free interest rate is of the form r(t) = 0.01 +0.04t, find the expected profit for the investor. An investor wants to purchase a portfolio consisting of long a call with exercise price E₁ = 190, and short a call with exercise price E₂ = 220, both to be exercised on the same date in 6 months time. The investor expects that the share price S(T) on the exercise date will be £183 with probability 0.2, £198 with probability 0.5, and £236 with probability 0.3. If the initial cost to invest in the portfolio was £12, and the risk free interest rate is of the form r(t) = 0.01 +0.04t, find the expected profit for the investor.
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Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Posted Date:
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