Question 2: Basic Concepts on Swaps (2/10) Consider at time t a bull spread on a financial asset St, with 1) long a call option with strike K and 2) short a call option with strike K2, Ki K2, the strategy may not be profitable in a sense that the return of the strategy can not be greater than the risk-free rate. Show that Indeed when ST > K2, the return is greater than the return of the risk-free zero-coupon bond, 1/Z(t, T), and thus the investment strategy can yield positive excess return. Question 2: Basic Concepts on Swaps (2/10) Consider at time t a bull spread on a financial asset St, with 1) long a call option with strike K and 2) short a call option with strike K2, Ki K2, the strategy may not be profitable in a sense that the return of the strategy can not be greater than the risk-free rate. Show that Indeed when ST > K2, the return is greater than the return of the risk-free zero-coupon bond, 1/Z(t, T), and thus the investment strategy can yield positive excess return