Question 1 Four European vanilla Call options Ci ( ⋅) on an underlier with no interim cash flows, have identical
maturity T . Their strike prices K i are such that K1 < K 2 < K 3 < K 4 and all strikes are equallyspaced. Interest rates are equal to zero.
A trader buys C ( K1 ) and C ( K 4 ) and sells C ( K 2 ) and C ( K 3 ) .
Draw an expiry payoff (not a profit) diagram illustrating the trading strategy [1 mark].Diagrams must be annotated with axis names and strike prices.What is the lower boundary for the value of the trading strategy? [2 marks]What is the upper boundary for the value of the trading strategy? [2 marks]
i.
ii.iii.
Total marks for question 1 [5 marks].
Question 2Two European vanilla options on an underlier with no interim cash flows, have identical maturity T .One is a Call C ( ⋅) and the other is a Put P ( ⋅) . Their strike prices K i are such that K1 < K 2 , and
interest rates are equal to zero.
A trader buys C ( K 2 ) and sells P ( K1 ) .
i.
Draw an expiry payoff (not a profit) diagram illustrating the trading strategy [1 mark].Diagrams must be annotated with axis names and strike prices.What is the lower boundary for the value of the trading strategy? [2 marks]What is the upper boundary for the value of the trading strategy? [2 marks]
ii.iii.
Total marks for question 2 [5 marks].
Question 3Three European vanilla options on an underlier with no interim cash flows, have identical maturityT . One is a Call C ( ⋅) and the other two are Puts Pi ( ⋅) . Their strike prices K i are such that
K1 < K 2 < K 3 , and interest rates are equal to zero.
A trader buys P ( K1 ) and C ( K 3 ) and sells P ( K 2 ) .
i.
Draw an expiry payoff (not a profit) diagram illustrating the trading strategy [1 mark].Diagrams must be annotated with axis names and strike prices.What is the lower boundary for the value of the trading strategy? [2 marks]What is the upper boundary for the value of the trading strategy? [2 marks]
ii.iii.