Discussion in 'Today's Daily Questions' started by Suzanne Evans, Aug 14, 2012.

Questions:

211.1. Among the following four strategies, which trading strategy both (i) involves an initial cash inflow to the investor and (ii) a positive future payoff in the event of a sufficiently low future stock price (option profit = future payoff - initial cost, without regard to time value of money)?

211.2. Today (T0), the current price of a stock is $20.00. Also today, the price of a six-month at-the-money (ATM) call option and an one-year ATM call option on the same stock is, respectively,$1.88 and $2.75. The strike price of both calls is$20.00 (i.e., ATM). Over the subsequent six months, it happens that the stock price, the stock's volatility and the risk-free rate are all unchanged: in six months, the stock price remains $20.00, the stock's volatility remains at 30.0%, and the riskfree rate remains at 4.0%. In six months (T+ 0.5 years), at expiration of the shorter maturity option, what is the profit of a neutral calendar spread ("neutral" refers to the use of ATM call options to employ the calendar spread)? a. -$0.87
b. Zero
c. +$1.01 d. +$2.75