Always produce a non-negative future payoff

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Suppose that CC1, CC2, and CC3 are the prices of European call options with strike prices KK1, KK2, and KK3, respectively, where KK3>KK2>KK1 and KK3 - KK2 = KK2 - KK1. All three options have the same expiration. Show that 2CC2 ≤ CC1 + CC2. (Hint: Consider a strategy that is long one call with strike KK1, long one call with strike KK3, and short two calls with strike KK2. Show this strategy will always produce a non-negative future payoff.)

Reference no: EM132393545

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