Consider a 6-month bull call spread on GME with strikes of $200 and $225. GME spot price is $215 and its volatility is 15%. The risk-free rate is 4% per annum continuously compounded. We assume that GME is not expected to pay any dividend.
(a) Use a 6-step binomial tree to price the spread (note: up and down movements need to match the volatility. Show all the tree parameters). (2 marks)
(b) What are the break-even point(s), the maximum profit and maximum loss for this strategy? (2 marks)
(c) Without using the binomial tree, what is the premium of the bear put spread with the same strike prices? Explain. (2 marks)
(a) using 6 - step binomial tree to price the spread
calculating upward and dowanward price