Question
The so-called box spread consists of four options: long E1 call, short E1 put, short E2 call and a long E2 put. 1. Calculate the
The so-called box spread consists of four options: long E1 call, short E1 put, short E2 call and a long E2 put.
1. Calculate the payoff from a box spread at expiration, in terms of E1 and E2.
2. Use put-call parity to calculate the price of the box spread at time = T t before expiration, if the risk-free rate is r > 0. You do not need to know the prices of the individual options to price the box spread!
3. Give an explanation for your answer from the no-arbitrage point of view.
4. Profits from option trading are often taxed at a reduced rate (because the investor undertakes risk), when compared to tax rate on wage or (risk-free) interest earnings. Why do you think the IRS takes a dim view of using box spreads?
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