options and futures

question;

A bull spread strategy is created by buying a European call option on a stock with a certain strike price and selling a European call option on the same stock with a higher strike price. Both options have the same expiration date. Suppose that an investor buys for 3 a 3-month European call with a strike price of 30 and sells for 1 a 3-month European call with a strike price of 35.

i. What is the total payoff of this bull spread strategy if the strike price in 3 months is 39?

(6 marks)

ii. What is the net profit to this strategy?

(4 marks)

(6 marks) ii What is the net profit to this strategy? (4 marks) c) The Black-Scholes formula for a European call option on a non-dividend paying stock is: C = S, Nd) - Xe Nd), where So is the stock price, X is the strike price, T is the time to maturity of the option, NO) is the cumulative standardized normal distribution, d. - OVT volatility. In(S, / X)+(r+o/2)T and do =d, -o-T , r is the risk free rate of interest and o is Use the Black-Scholes formula to find the price of a European call option on a non-dividend- paying stock when the stock price is $26, the strike price is $25, the risk-free interest rate is 6% per annum, the volatility is 15% per annum, and the time to maturity is 3 months. (8 marks) [Total: 25 marks] END OF QUESTION FOUR END OF SECTION B END OF QUESTION PAPER PLEASE SEE PAGE 8 FOR THE ANSWER SHEET