--%>

What is Box Spread

Box Spread: This is another strategy which seeks to exploit the arbitrage opportunities which are available in the market. In case that the options are correctly priced, this strategy would earn only the risk free rate. However, due to existence of imperfections in the market, this strategy can be used to profit on the mispricing in the market. One type of this strategy is the buying of a call option that has a lower exercise price and buying a put with the higher exercise price while selling the call with the higher exercise price and selling the put with the lower exercise price. The value of this box spread at expiration is given by:

Value = max (0, ST – X1) – max (0, ST – X2) + max (0, X2 – ST) – max (0, X1 – ST)

In this case, two of the four options would definitely expire in the money while two would expire out of money. The holder of the box spread basically ends up with the purchase of the underlying with the exercise of one option (either the long call at X1 or the short put at X1) while at the same time, the investor also sells the underlying asset through either the long put at X2 or through the short call at X2. The net effect is that the investor buys the asset at X1 and sells it X2. If the markets are efficient, only the risk free rate would be earned else the anomalies in the pricing of the security would be gained.

   Related Questions in Corporate Finance

  • Q : Profitability Ratios Profitability

    Profitability Ratios: These ratios comprise the Gross profit Margin, Net profit Margin, Operating Margin, Return on Equity (ROE), and Return on Total Assets. Such ratios help the firm to examine its profitability, the trend in profits and aid to take

  • Q : Which frame work does not give very

    Which model of frame work does not provide the very good prices for bonds?

  • Q : Tax benefits of lease FedEx would like

    FedEx would like to acquire 300 vans for its business. It can buy each van for $35,000, depreciate it completely over 5 years, and then sell it for $10,000. The tax rate of FedEx is 30%, and its cost of debt is 10%. Avis Fleet Rental will lease these vans to FedEx for

  • Q : What is the impact of auto portfolio

    What is the impact of auto portfolio into the quotation of the shares?

  • Q : Explain the working of breakthrough for

    Explain the working of breakthrough in low-discrepancy sequences used for option valuation.

  • Q : How can industrial company inflate

    How can any industrial company inflate the value of its inventory so as to decrease net income and the taxes is has to pay in a year?

  • Q : Efficiency Ratios Efficiency Ratios :

    Efficiency Ratios: These ratios comprise Receivables Turnover, Inventory Turnover, Asset Turnover and Net Working Capital Turnover ratios. Efficiency ratios show the utilization of Assets of the company thus as to generate Revenue that is, the best ut

  • Q : Is book value the excellent proxy to

    Is book value the excellent proxy to the value of the shares?

  • Q : Set of conflicts in reducing working

    Give an illustration of a set of conflicts encountered when attempting to reduce working capital?

  • Q : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures