question archive An investor started a calendar spread in November 2020 with a short position in 1-year European put anda long position in 2-year European put
An investor started a calendar spread in November 2020 with a short position in 1-year European put anda long position in 2-year European put
Subject:FinancePrice: Bought3
An investor started a calendar spread in November 2020 with a short position in 1-year European put anda long position in 2-year European put. Both puts are on the same non-dividend-paying stock and havethe strike price of$100. At that time, the price of 1-year put was$7 and the price of 2-year put was$10.One year has passed, and the investor is now about to close all of the positions. The current stock price is$90 and the risk-free interest rate is 3% per annum. What is smallest and largest possible profit from thiscalendar spread? (Hint: Consider the lower/upper bound for the put price.)
