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Exercise 1.5. A bull call spread is composed of a long call at strike Ej and a short call at strike E2, with E2 >
Exercise 1.5. A bull call spread is composed of a long call at strike Ej and a short call at strike E2, with E2 > E1 (a) Graph the payoff diagram for the bull call spread. (b) Prove / argue that the setup cost (the price of the spread) must be > 0. (c) Hence show that the call price C(S, E, T) is decreasing as a function of E (other parameters being kept constant). (d) Similarly find the upper bound on the setup cost of the bull call spread
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