Finance Junkie
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Postby » Mon Oct 07, 2013 12:05 pm

A European-style call spread consists of a long position in the 105 strike call and a short position in the 115 strike call both maturing in 18 months. The options are on a stock index with an annualized dividend yield of 1% per annum. The interest rates are 4% (annual compounding) for 1 year and 5% (annual compounding) for 2 years. Under these circumstances, what is the number nearest the maximum value of this position today?
Choose one answer.
Choose one answer.
a. 9.5
b. 10
c. 9.29
d. 9.4

Please explain the answer

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm


Postby pradeeppdy » Thu Oct 10, 2013 7:39 am

Ans is A, The pay off at maturity is bounded above by $10. So, maximum can be obtained by discounting $10 to "today" based on the given yield curve information.
It is 10/[(1.04) × (1 + 0.045/2) = 9.5

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