Question
A stock is currently sold for $50, and is expected to pay a dividend of $0.75 in one month. The risk-free force of interest (i.e.,
A stock is currently sold for $50, and is expected to pay a dividend of $0.75 in one month. The risk-free force of interest (i.e., the interest rate compounded continuously) is 6% per year. A 6-month 50-strike European call option on the stock is trading at $5.19, and a 6-month 60-strike European call option on the same stock is trading at $1.96. Let S be the stock price six months from now. Consider the following option strategies: Strategy A: A 6-month long 5060 European bear spread. Strategy B: A 6-month long 5060 European collar. Determine the range of values of S such that the profit of Strategy A is above that of Strategy B.
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