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- 3/20/12
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Im studying on derivative securities, and here is the question from lastyear final exam. im not sure what the answers are? but just want to prepare for the final examination. can anyone give me the answer and explain.
Questions
Let C(K) denote a European vanilla Call option with strike price . Assume that all options are identical except for strike price, and strike prices satisfy K1< K2<K3and 2K2 = K1+K3.
Question 1
What are the no-arbitrage lower bound, and the no-arbitrage upper bound, of the vertical spread
C(K1) −C(K2)?
Question 2
Derive the functional relationship between the no-arbitrage values of the two vertical spreads,
C(K1) - C(K2) and C(K2) - C(K3).
Questions
Let C(K) denote a European vanilla Call option with strike price . Assume that all options are identical except for strike price, and strike prices satisfy K1< K2<K3and 2K2 = K1+K3.
Question 1
What are the no-arbitrage lower bound, and the no-arbitrage upper bound, of the vertical spread
C(K1) −C(K2)?
Question 2
Derive the functional relationship between the no-arbitrage values of the two vertical spreads,
C(K1) - C(K2) and C(K2) - C(K3).