Assume that the effective 6-month interest rate is 2\%, the S&R 6-month forward price is $1020, and use the premiums in the table below for the S&R options with 6 months to expiration. Strike Call Put 1000 93.809 74.201 1020 84.470 84.470 Consider the ratio spread position on the S&R index consisting in buying four 1000-strike call options and selling three 1020-strike call options. a) Find the payoff as a function of S, the spot price of the S&R index in 6 months. b) Draw payoff and profit diagrams for this ratio spread position. c) For which values of the spot price S at expiration will this position outperform a long 1000-strike straddle?
Assume that the effective 6-month interest rate is 2\%, the S&R 6-month forward price is $1020, and use the premiums in the table below for the S&R options with 6 months to expiration. Strike Call Put 1000 93.809 74.201 1020 84.470 84.470 Consider the ratio spread position on the S&R index consisting in buying four 1000-strike call options and selling three 1020-strike call options. a) Find the payoff as a function of S, the spot price of the S&R index in 6 months. b) Draw payoff and profit diagrams for this ratio spread position. c) For which values of the spot price S at expiration will this position outperform a long 1000-strike straddle?
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 1P
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