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Q7 You purchase a 1-year, 90-105-110 asymmetric butterfly spread using call options. You are given the following information: (i) Your spread uses & long 90-strike
Q7 You purchase a 1-year, 90-105-110 asymmetric butterfly spread using call options. You are given the following information: (i) Your spread uses & long 90-strike call options and I long 110-strike call option. (ii) The annual continuously compounded risk-free interest rate is 1%. (iii) The stock price in 1 year equals $94.51. (iii) Current 1-year option prices are: Strike 90 95 100 105 Call Price 12.81 10.33 7.98 X 110 4.50 If you break-even with your position, find X. Is X an arbitrage-free price? If not, design a strategy to take advantage of the arbitrage opportunity. Q7 You purchase a 1-year, 90-105-110 asymmetric butterfly spread using call options. You are given the following information: (i) Your spread uses & long 90-strike call options and I long 110-strike call option. (ii) The annual continuously compounded risk-free interest rate is 1%. (iii) The stock price in 1 year equals $94.51. (iii) Current 1-year option prices are: Strike 90 95 100 105 Call Price 12.81 10.33 7.98 X 110 4.50 If you break-even with your position, find X. Is X an arbitrage-free price? If not, design a strategy to take advantage of the arbitrage opportunity
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