4 Question 4 . A butterfly spread consists of three options on the same stock. o All three options have the same expiration time T. The options have strike prices K1, K2 and K3, which are are equally spaced . Hence K2 is located at the midpoint of Ki and K3, so K2 (K1+ K3)/2 . A butterfly spread can be created using three call options or three put options. . The spread consists of long one option at Ki, short two options at K2, long one option at K3 4.1 European option butterfly spreads . Suppose the market price of a stock is S at the current time t. The stock does not pay dividends. The interest rate is 0 (a constant) For a Europcan call and put c and p with the same strike K and expiration T, the put-call parity relation in this case is Let c and pi1,2, 3, be the values of European calls and puts with strikes K1, K2 and Ky, where K2 (K1 + Ks) /2 .Useeq. (4.1) to prove teolowing relation: (4.2) . The values of a European call butterfly spread and a European put butterfly spread are equal. The corresponding relation is nt necessarily true for American options 4 Question 4 . A butterfly spread consists of three options on the same stock. o All three options have the same expiration time T. The options have strike prices K1, K2 and K3, which are are equally spaced . Hence K2 is located at the midpoint of Ki and K3, so K2 (K1+ K3)/2 . A butterfly spread can be created using three call options or three put options. . The spread consists of long one option at Ki, short two options at K2, long one option at K3 4.1 European option butterfly spreads . Suppose the market price of a stock is S at the current time t. The stock does not pay dividends. The interest rate is 0 (a constant) For a Europcan call and put c and p with the same strike K and expiration T, the put-call parity relation in this case is Let c and pi1,2, 3, be the values of European calls and puts with strikes K1, K2 and Ky, where K2 (K1 + Ks) /2 .Useeq. (4.1) to prove teolowing relation: (4.2) . The values of a European call butterfly spread and a European put butterfly spread are equal. The corresponding relation is nt necessarily true for American options