Four European vanilla Call options ()iC· on an underlier with no interim cash flows, have identical maturity T. Their strike prices iK are such that 1234KKKK<<< and all strikes are equally spaced. Interest rates are equal to zero.
A trader buys ()1CK and ()4CK and sells ()2CK and ()3CK.
i. Draw an expiry payoff (not a profit) diagram illustrating the trading strategy [1 mark]. Diagrams must be annotated with axis names and strike prices.
ii. What is the lower boundary for the value of the trading strategy? [2 marks]
iii. What is the upper boundary for the value of the trading strategy? [2 marks]