Calculate the payoff from a box spread at expiration

Assignment Help Finance Basics

Reference no: EM131953302

Question: The so-called "box spread" consists of four options: long E1 call, short E1 put, short E2 call and a long E2 put.

1. Calculate the payoff from a box spread at expiration, in terms of E1 and E2.

2. Use put-call parity to calculate the price of the box spread at time t = T - t before expiration, if the risk-free rate is r > 0. You do not need to know the prices of the individual options to price the box spread!

3. Give an explanation for your answer from the "no-arbitrage" point of view.

4. Profits from option trading are often taxed at a reduced rate (because the investor undertakes risk), when compared to tax rate on wage or (risk-free) interest earnings. Why do you think the IRS takes a dim view of using box spreads?

Reference no: EM131953302

Questions Cloud

What social forces affect theauto manufacturing industry : What social forces affect theAuto manufacturing industry? Please provide the sources you used to answer the question .

How much must your firm borrow in order to obtain funds : Canada Corp., needs $16,000 for one quarter to finance a deficit. Interest charges are 4% per quarter. Your bank requires an 8% compensating balance.

How conditions of inequality based on social class : Write a 3-4 page research paper that discusses how conditions of inequality based on social class are manifested from the functionalist perspective.

What negative ones would you want to try to overcome : What positive perceptions, enablers, and nurturers would you want to reinforce? What negative ones would you want to try to overcome?

Calculate the payoff from a box spread at expiration : Calculate the payoff from a box spread at expiration, in terms of E1 and E2. Use put-call parity to calculate the price of the box spread at time.

Companies operating in foreign markets : Why is global risk management such an important requirement for companies operating in foreign markets?

Issues that might impact the safety of expatriates : Question 1: Choose one country and identify and discuss 3 major issues that might impact the safety of expatriates living abroad in this country.

Design a plan to reduce the exposure of workers to noise : Design a plan to reduce the exposure of workers to noise produced by equipment in this facility, particularly the presses and conveyor belts.

How to encourage smarter use of it : HBR article titled - How to encourage smarter use of IT describes how change is driven from psychological, not just logical, forces.

User Account

All Pages