Questions: Let C (K) denote a European vanilla Call option with strike price K. Suppose that all options are identical except for strike price, and strike prices satisfy K1< K2 < K3 and 2K2 = K1 + K3
Question 1: What are the no-arbitrage lower bound and the no-arbitrage upper bound of the vertical spread C (K1) - C (K2)?
Question 2: Derive the functional relationship among the no-arbitrage values of the two vertical spreads C (K1) - C (K2) and C (K2) - C (K3).