Question
Today is January 18, 2019 and the continuously compounded interest rate is r = 5%. A bank makes a market in 50/60 March 2019 bull
Today is January 18, 2019 and the continuously compounded interest rate is r = 5%. A bank makes a market in 50/60 March 2019 bull call spreads on crude oil. Specifically, if you buy the bull spread from the bank as an investor then you buy one call on crude oil with strike $50 and premium C50 = 10.53$, and you sell one call on crude oil with strike $60 and premium C60 = 3.04$. Both options are European and mature on March 15, 2019. There is no bid-ask spread nor any other transaction costs.
(a) (1 point) What are the possible cash flow that you receive at maturity if you buy this bull spread ?
(b) (1 point) What is the price of the bull call spread ?
(c) (2 points) Which portfolio enables the bank to hedge ?
(d) (1 point) What are the advantages of the bull call spread for the hedger ?
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