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Q1. A bullish call spread is bullish on direction. Is it also bullish on volatility? Let's assume the payoff diagram with exercise price is $95 and $100 for a call bull spread. Explain your answer.
Q2. Assume KBC stock is currently at S = $100. After one period, the price will move to one of the following two values: [uS and dS], where [u = 1.2; d = 0.9]. A $1.00 investment in the risk-free asset using continuous compounding will return $1.10 at the end of the period.
(a) Find the risk-neutral probabilities governing the movement of the stock price.
(b) For a strike price of 100 for call, find the delta of the call.
(c) For a strike of 100 for put, find the delta of the put.
(d) Compute the difference between the call delta and the put delta and explain the answer you get.
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