--%>

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 : Problem on EBIT ABC Corporation stock

    ABC Corporation stock sells at $27 per share and its dividend per share is $1.20. ABC has price-earnings ratio of 16. The company contains $40 million worth of bonds, selling at par, with 8.5% coupon. The EBIT of ABC is of $12 million and its tax rate is 30%. Calculat

  • Q : Strategy of Bear Spread State when

    State when markets are anticipated to go down then what is the Strategy of Bear Spread?

  • Q : What are the different types of

    What are the different types of mathematics found in quantitative finance?

  • Q : DCF Analysis AB Corp. is in the

    AB Corp. is in the business of making white-board markers. They are computing the potential of investing in some new equipment that will enhance their manufacturing process.  The initial cost of the latest machinery is $470,000 plus a one-time installation cost o

  • Q : Iterative System Solvers Iterative

    Iterative System Solvers, Power Methods, and the Inverse Power Method for Boundary Value Problems. 1. Code and test Jacobi and Gauss-Sidel solvers for arbitrary diagonally dominant linear systems. 2. Compare performance/results with tridiagonal Gaussian elimination so

  • Q : Who described option pricing with

    Who described option pricing with deterministic volatility?

  • Q : Investors are irrational or naive

    Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

  • Q : Illustrates beta and capital structure

    We are valuing a company, many smaller than ours, so as to buy it. As that company is too smaller than ours this will have no influence on the capital structure and at the risk of the resulting company. It is the reason why I believe this the beta and the capital stru

  • Q : Bank assignment You have just been

    You have just been hired as the branch manager for a big bank in XYZ. You were told that the bank is going to open a new branch at Island Learning Centre of the Open University of XYZ. The management of the bank is much concerned that the new branch might not be able

  • Q : Markets are expected to be Volatile

    When Markets are expected to be Volatile: For the bear and bull strategy to yield gains, it is essential that the trader takes a view on the direction of the market i.e. either bearish or bullish, and accordingly implement the strategic choice. More o