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Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and...

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Finance

Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. European put options on the stock with maturity of one year and strike prices of $25, $30, and $35 cost $0.70, $2.14, and $4.57, respectively.

A butterfly spread can be created using these European put options by buying two puts, one with a low strike price and one with a high strike price, and selling two puts with an intermediate strike price.

  1. What is the cost of the butterfly spread? (2 point)

b) Using a table showing the relationship between profit and final stock price. Ignore the impact of discounting.

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