Problem:
Suppose that there are two calls on the same stock: one with exercise price K of $30, the other $35. The market value of the call with K = $30 is $2 while that for call with K=$35 is $1.5.
Required:
Question 1: What positions you need to take in each of the options to create a bullish call spread? Bearish call spread?
Question 2: Describe the payoffs at various stock prices with a set of equations or table, for each strategy.
Note: Show supporting computations in good form.