Question: Box spread is buying a forward contract with a forward price of K 1 and selling a forward contract with a forward price of K

  1. Box spread is buying a forward contract with a forward price of K1 and selling a forward contract with a forward price of K2. This can be viewed as buying an artificial zero-coupon bond with a face value of K2 - K1. This can also be viewed as a portfolio of a call bull spread and a put bear spread with the same two strike prices. The bull spread is made of calls with strike prices of $28 and $35. The bear spread is made of puts with the same strike prices. The time to maturity of these options is 3 months. If the interest rate is 6% continuously compounded, what is the cost of creating the box spread? (Hint: Since a box spread can be viewed as an artificial zero coupon bond, what would the payoff be at maturity, and so how much should it cost today?)

A.$5.40

B.$6.90

C.$7.30

D.$8.10

E.$9.00

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