Assume that the risk free interest rates are zero. Consider an asset with spot price 50.
The values of the following options on this asset are given below:
Option Type Strike Maturity Value
Put 45 8 months $1.5
Put 56 8 months $7.25
Call 45 8 months $7.5
Call 56 8 months $2.25
(a) Synthesize a 45-56 bull spread using only the call options. Draw the P&L diagram at maturity of the bull spread.
(b) Synthesize a 45-56 bull spread using only the put options. Draw the P&L diagram at maturity of the bull spread.
(c) Synthesize a 45-56 bear spread using only the call options. Draw the P&L diagram at maturity of the bull spread.