Let K < K be two strike prices, each associated with a different call. These two...

 

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Let K₁ < K₂ be two strike prices, each associated with a different call. These two calls are European calls, both on the same underlying non dividend paying stock and for the same expiration date, T. Denote the premium of the call associated with K₁ by C₁, and the premium of the call associated with K₂,by C₂. Prove: The difference between the premiums of the two calls, C₁-C₂ cannot exceed (must be less than or equal to) the discounted value of the difference between the strike prices, PV[K₂ - K₁] In notations, (numbers are not accepted) prove that: C₁-C₂ ≤ (K₂-K₁)e¯(T-t) Let K₁ < K₂ be two strike prices, each associated with a different call. These two calls are European calls, both on the same underlying non dividend paying stock and for the same expiration date, T. Denote the premium of the call associated with K₁ by C₁, and the premium of the call associated with K₂,by C₂. Prove: The difference between the premiums of the two calls, C₁-C₂ cannot exceed (must be less than or equal to) the discounted value of the difference between the strike prices, PV[K₂ - K₁] In notations, (numbers are not accepted) prove that: C₁-C₂ ≤ (K₂-K₁)e¯(T-t)

Answer rating: 100% (QA)

To demonstrate that C C K Ke rt where r is the gamble free loan cost and t is the chance to lapse we can involve the idea of noexchange in choices val... View the full answer