Question
European call options on MSL are available with strike prices of $15, $17.5, and $20 and expiration dates in 3 months. Their prices are $4,
European call options on MSL are available with strike prices of $15, $17.5, and $20 and expiration dates in 3 months. Their prices are $4, $2, and $0.5, respectively. We consider the following strategy (which is called a butterfly spread):
Buy a call option with a strike price of $15, write two calls with a strike price of $17.5, and buy a call option with a strike price of $20.
a) What are the profits of the strategy under different future prices (ST)? You can either fill the table provided in the answer template or you can draw a figure.
b) Based on your results, provide some intuition about who would be interested in using this strategy.
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