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Suppose that for the same asset and expiry date, you hold a European call option with exercise price E1 and another with exercise price E3,

Suppose that for the same asset and expiry date, you hold a European

call option with exercise price E1 and another with exercise price E3, where

E3 > E1 and also write two calls with exercise price E2 := (E1 + E3)/2. This is an example of a butterfly spread.

Derive a formula for the value of this butterfly spread at expiry and draw the corresponding payoff diagram.

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