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Please provide a detailed and thorough answer! Thank you! 3) Using the options positions (below) and the prices (in the table below), construct a spread
Please provide a detailed and thorough answer! Thank you!
3) Using the options positions (below) and the prices (in the table below), construct a spread that includes a "C Jan 40/45" and a "P Jan 45/40". You need to show the combined payoffs for each of the 4 positions separately and what the total payoff is by regions of the combined positions. Assuming that the risk-free interest rate is 8% (per annum) and that the options are three-month options, what do you see in the above (combined) spread(s)? Once done with the overall payoffs by region, tell me what you might think is the purpose of these combined spreads. (Hint: think about the prices of the options, the interest rate, and the timing of the payoffs relative to the options) Step by Step Solution
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