What relationships hold between the prices

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Reference no: EM131243568

For Questions assume all options are European style with maturity T.A'K call' is call option with strike price K. A 'knockout' option has payout zero if the defined event occurs.

Butterflies, condors and call ladders

(a) Recall that a call butterfly with strikes (K₁, K₁ + β, K₁ + 2β), for some fixed β > 0, is a portfolio consisting of +1 K₁ call, +1 (K₁ + 2β) call and -2 (K₁ + β) calls. Using put-call parity or otherwise, restate the call butterfly as a portfolio consisting solely of puts.

(b) A callcondor is a portfolio consisting of +1 K call, -1 (K + β) call, -1 (K + 2β) call and +1 (K + 3β) call. Draw the payout of the condor, and express the condor as a portfolio consisting solely of call butterflies.

(c) A call ladder consists of +1 K call, -1 (K + β) call and -1 (K + 2β) call. What relationships hold between the prices at time t ≤ T of the call ladder, butterfly and condor with common maturity T?

Reference no: EM131243568

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