Suppose that European call options with strike prices $30, $35, and $40 cost $7, $4, and...

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Suppose that European call options with strike prices $30, $35, and $40 cost $7, $4, and...

Suppose that European call options with strike prices $30, $35, and $40 cost $7, $4, and $2, respectively. What is the upfront cash flow of creating a butterfly spread using these three call options?

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Answer 1

Answer #1

In butterfly spread we buy call of strike 30 and 40 and sell call of strike 35

Net cost=7+2-2*4=1

Upfront cash flow=-1 i.e, cash is required to create the strategy

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Answer 2

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