Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Assume that the effective 6-month interest rate is 2\%, the S&R 6-month forward price is $1020, and use the premiums in the table below
for the S&R options with 6 months to expiration.
Strike
Call
1000 93.809
Put
74.201
1020 84.470 84.470
Consider the ratio spread position on the S&R index consisting in buying four 1000-strike call options and selling three 1020-strike call
options.
a) Find the payoff as a function of S, the spot price of the S&R index in 6 months.
b) Draw payoff and profit diagrams for this ratio spread position.
c) For which values of the spot price S at expiration will this position outperform a long 1000-strike straddle?
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Transcribed Image Text:Assume that the effective 6-month interest rate is 2\%, the S&R 6-month forward price is $1020, and use the premiums in the table below for the S&R options with 6 months to expiration. Strike Call 1000 93.809 Put 74.201 1020 84.470 84.470 Consider the ratio spread position on the S&R index consisting in buying four 1000-strike call options and selling three 1020-strike call options. a) Find the payoff as a function of S, the spot price of the S&R index in 6 months. b) Draw payoff and profit diagrams for this ratio spread position. c) For which values of the spot price S at expiration will this position outperform a long 1000-strike straddle?
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