Question
Suppose that the 6-month European put options on a stock with strike prices of $30 and $35 cost $4 and $7, respectively, and the stock
Suppose that the 6-month European put options on a stock with strike prices of $30 and $35 cost $4 and $7, respectively, and the stock does not pay dividends.
(a) How can the put options be used to create a bull spread? What is the break-even stock price for the bull spread?
(b) If the stock is currently traded at $32 a share and the 6-month risk-free rate is 2% with continuous compounding, what are the prices of the 6-month European call options on the stock with strike prices of $30 and $35, respectively?
(c) What call and put options should be used for a reverse range forward? Calculate the profit/loss of the range forward if the stock price is $40 per share in six months.
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