Suppose that European call options on a stock with strike prices $30and $36cost $7and $4,respectively. The two
Question:
Suppose that European call options on a stock with strike prices $30 and $36 cost $7 and $4, respectively. The two options have the same maturity.
(a) Create a bull spread option portfolio using the two options.
(b) Let Sr be the stock price at the maturity of the options. If Sr = 34, the profit from the bullspread strategy in (a) would be $ ? (* Let's ignore the effect of interest when calculating the profit.)
A European call with a strike price of $60 costs $4. A European put with the same strike price and expiration date costs $3.
(a) Create a straddle option portfolio using the two options.
(b) Let St be the stock price at the maturity of the options. For what range of Sr would the straddle strategy in (a) lead to a loss? (* Let's ignore the effect of interest when calculating the profit.)
Expert Answer:
For the Bull Spread Option Portfolio a A bull spread involves buying a call option with a lower stri... View the full answer
