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Collar
A collar can be established by holding a share, along with purchasing a protective put and writing a covered call, where both options at out-of-money..
For Example - ONGC
Underlying stock = Rs. 809
Buy Mar Rs. 800 Put @ Rs.16
Write Mar Rs. 880 Call @ Rs.7.25
Total price for this strategy = 809 + 16 + 7.25 = Rs. 832.25
Maximum Profit: Limited
Call strike - Initial spot price - Put Premium = 880 - 809 - 16 = Rs. 55
Maximum Loss: Limited
Initial spot price - Put strike + Call Premium = 809 - 800 + 7.25 = Rs. 16.25
So an arbitrage opportunity to the tune of Rs. 55 (max) is available if the price target of Rs. 880 or beyond is achieved. On the flip side, we have losses, which are capped at a maximum of Rs 16.25 for price Rs. 800 and below.
Nominal spread of a non-treasury bond can be defined as the difference between the bond's yield and the yield to maturity of a benchmark treasury coupon security.
The volatility assumption has a great influence on the arbitrage free value of the bond. The higher the expected volatility, the greater the value of an option. W
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