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1 B. Suppose that C, C and C3 are the prices of European call options with strike prices K, K and K3, respectively, where K3

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1 B. Suppose that C, C and C3 are the prices of European call options with strike prices K, K and K3, respectively, where K3 > K > K and K3 - K = K -K. All options have the same maturity. Show that C (C + C3) (Hint: you may consider a portfolio that is long one option with strike price K, long one option with strike price K3, and short two options with strike price K.) (40%)

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