Compute the payoff and net payoff of a bear spread strategy built with put options in the three scenarios above. The put options should have strikes 405 and 409 and mature in February. Draw the profile of the bear spread strategy. Use the data in Table 2. Please show your calculations. Discuss your result.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Scenarios: You work in the macroeconomic research department of an investment bank. Based on your modelling of the economy, you think that in the next few months US GDP will evolve according to three basic scenarios:

Scenario A: GDP will rise 3%. This will send the S&P ETF to 414.

Scenario B: GDP will stagnate. S&P ETF will stay at 407.

Scenario C: GDP will fall 2%. This will send the S&P ETF to 400.

 

Question 1:

Compute the payoff and net payoff of a bear spread strategy built with put options in the three scenarios above. The put options should have strikes 405 and 409 and mature in February. Draw the profile of the bear spread strategy. Use the data in Table 2. Please show your calculations. Discuss your result. 

 

You observe the following market for European Call and Put options on the S&P 500 ETF:
Today
10th January 2023
407
Spot index level:
Maturity: 17th February 2023
Strike
403
404
405
406
407
408
409
410
411
Calls
7.06
5.92
4.79
3.66
2.57
2.57
2.63
2.73
2.85
Maturity: 17th March 2023
Calls
8.69
7.40
6.12
4.85
3.58
3.73
3.93
4.16
4.42
Strike
403
404
405
406
407
408
409
410
411
Table 2
Puts
2.21
2.07
1.93
1.81
1.71
2.71
3.77
4.87
5.99
Puts
3.21
2.93
2.64
2.36
2.09
3.23
4.43
5.66
6.92
Transcribed Image Text:You observe the following market for European Call and Put options on the S&P 500 ETF: Today 10th January 2023 407 Spot index level: Maturity: 17th February 2023 Strike 403 404 405 406 407 408 409 410 411 Calls 7.06 5.92 4.79 3.66 2.57 2.57 2.63 2.73 2.85 Maturity: 17th March 2023 Calls 8.69 7.40 6.12 4.85 3.58 3.73 3.93 4.16 4.42 Strike 403 404 405 406 407 408 409 410 411 Table 2 Puts 2.21 2.07 1.93 1.81 1.71 2.71 3.77 4.87 5.99 Puts 3.21 2.93 2.64 2.36 2.09 3.23 4.43 5.66 6.92
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