Response to the following problem:
The following three call options on gold, all expiring in three months, sell for:
Exercise price Option price
$1200 $ 62
$1250 $ 40
$1300 $ 23
Consider the following position: buy 1 call with K = 1200 sell (write) 2 calls with K = 1250 buy 1 call with K = 1300
What would be the values at expiration of such a spread for various prices of spot gold? What investment would be required to establish the spread?
Given information about the prices of the $1200 and $1300 options, what could you predict about the price of the $1250 option?