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A SPREAD is an investment strategy that involves the simultaneously buying and selling equal number of options on the same underlying security but with different strike prices.
Consider the following spread created by call options with the same expiration date on the same stock:
A SHORT position in a call option with a premium of $5 and a strike price of $50.
A LONG position in a call option with a premium of $2 and a strike price of $60.
a) Draw the profit/loss graph for this strategy (be sure to draw BOTH the short call and the long call positions) Fin 330 – Fall 2015
b) What is the payoff of this spread at expiration if the stock price of the underlying stock is $40?
c) What is the payoff of this spread at expiration if the stock price of the underlying stock is $65?
A company wants to raise $100 million on a new stock issue. According to their investment banker, a sale of new stock will require 8% under pricing and a 7% spread. Assuming the company’s stock price does not change from its current price of $100 per..
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