Jeremiah is bearish on the XYZ index whose spot price is $260.00 per share. In an attempt to profit Jeremiah purchases 100 bear spreads created by buying three month puts with strike 260 each costing 3.80, and selling three month puts with strike 250 each costing 1.90. Assume that the continuously compounded risk free rate is .03.
(a) What is the net debit to Jeremiah’s account at time 0?
(b) Sketch the payoff function for Jeremiah’s position.
(c) What is Jeremiah’s profit(loss) if the index is priced at $252.00 at expiration?
(d) What is the maximum profit that can be obtained from this position if it is held to expiration?