Consider a portfolio that consists of the following four derivatives: 1) a put option written (sold) with strike price K − 5, 2) a call option purchased with strike price K − 5, 3) a call option written (sold) with strike price K + 5, and 4) a put option purchased at strike price K + 5. All options are European. The risk-free rate is rf , the time to expiration is T, the initial stock price is S0, and the stock price at maturity is ST . What are the payoffs at expiration of this portfolio? What must the price of this portfolio be?
Consider a portfolio that consists of the following four derivatives: 1) a put option written (sold) with strike price K − 5, 2) a call option purchased with strike price K − 5, 3) a call option written (sold) with strike price K + 5, and 4) a put option purchased at strike price K + 5. All options are European. The risk-free rate is rf , the time to expiration is T, the initial stock price is S0, and the stock price at maturity is ST . What are the payoffs at expiration of this portfolio? What must the price of this portfolio be?
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