Question: b. Call options on the same underlying and with the same maturity have the following prices: Option Strike Price Option Premium Call1 100 12 Call2

b. Call options on the same underlying and with the same maturity have the following prices: Option Strike Price Option Premium Call1 100 12 Call2 110 7 Call3 120 6 Consider a strategy comprising a short Call1 option long two Call2 options and short one Call3 option. Identify the strategy and derive the profits to such a strategy, detailing and carefully explaining your calculations. Compute exact maturity profits for values of the underlying of 100, 110, 120 and 130 explaining your calculations. Depict in a graph the profit to this strategy as well as the options it is comprised of, explaining carefully the rationale of the investor engaging in this strategy. [10 marks]

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