Suppose that c1,c2, and c3 are the prices of European call options with strike prices...
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Suppose that c1,c2, and c3 are the prices of European call options with strike prices K1,K2, and K3, respectively, where K3>K2>K1 and K3K2=K2K1. All options have the same maturity. Show that c20.5(c1+c3) (Hint: Consider a portfolio that is long one option with strike price K1, long one option with strike price K3, and short two options with strike price K2.) Suppose that c1,c2, and c3 are the prices of European call options with strike prices K1,K2, and K3, respectively, where K3>K2>K1 and K3K2=K2K1. All options have the same maturity. Show that c20.5(c1+c3) (Hint: Consider a portfolio that is long one option with strike price K1, long one option with strike price K3, and short two options with strike price K2.)
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