Answered step by step
Verified Expert Solution
Question
1 Approved Answer
RSM332 Spread Payoff - ST X+a X + 2a X + 3a 4. A RSM332 spread is a combination of option positions that involves four
RSM332 Spread Payoff - ST X+a X + 2a X + 3a 4. A RSM332 spread is a combination of option positions that involves four strike prices, along with a zero-coupon bond with face value of $a (a >0). All the options are European. They have the same maturity as the bond. See the figure above, which shows the gross payoffs of the combination of the options and the bond. (a) Find the option positions and strike prices necessary to obtain the RSM332 spread. Show that your portfolio replicates the spread payoff and assume that the underlying options are all call options. (b) Find the option positions and strike prices necessary to obtain the RSM332 spread. Show that your portfolio replicates the spread payoff and assume that the underlying options are all put options. (c) A European put option with a strike price of $50 is trading at a price of $5.80. A European call option with a strike price of $50 is trading at a price of $0.40. Both options expires in 6-months and the 6-month spot rate is 1.5%. The stock underlying the options is trading at $43.00. Is there an arbitrage opportunity? If so, what is your trading strategy and profit? (Note part (c) may be unrelated to (a) and (b).)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started