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No-arbitrage lower bound and no-arbitrage upper bound

Let C (K ) denote a European vanilla Call option with strike price K. Assume that all options are identical except for strike price, and strike prices satisfy K₁< K₂ < K₃ and 2K₂ = K₁ + K₃.

Question 1: ?What are the no-arbitrage lower bound, and the no-arbitrage upper bound, of the vertical spread:

C(K₁) − C(K₂)?

Question 2: Derive the functional relationship between the no-arbitrage values of the two vertical spreads:

C(K₁) − C(K₂) and C(K₂) − C(K₃).

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Finance Basics: No-arbitrage lower bound and no-arbitrage upper bound

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Solution Preview :

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Finance Basics: No-arbitrage lower bound and no-arbitrage upper bound

Reference No:- TGS01302

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Reference No:- TGS01302

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