Application of Derivatives - Silva (do we assume butterfly spread is using calls only?)

CFA Level III Derivatives
#1

Exercise Call Put Price Price Price $1,100 $95.85 $42.60 $1,125 $80.50 $48.00 $1,150 $64.70 $60.00

Strategy A: A butterfly spread strategy using the options information provided in Exhibit 1.

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Based on the information in Exhibit 1, the maximum profit per contract for Strategy A is closest to:

From what I know, butterfly spread can be created from both puts and calls. they just used calls.

Is it by default to take calls or this is poorly worded question?

#2

You should get the same result using puts so it doesn’t matter.

#3

Should be the same result otherwise, arbitrage opportunity.

  • Buy a call X_L, sell two calls X_M, and buy a call X_H

  • Buy a put X_H, sell two puts X_M, and buy a put X_L

  • Sell a put and call X_M, buy a put X_L, and buy a call X_H

#4

got it…

thanks

#5

actually, they don’t cost the same… shouldn’t they cost the same?

using calls cost = 95.85 - 2*80.50 + 64.70 = -0.45

using puts cost = 42.60 - 2*48.00 + 60.00 = 6.6

#6

I’m tired and I am looking at this through foggy eyes, but the math doesn’t work on the put side. I think I got $1800 something. Profit should be identical with either puts or calls.

#7

That’s why I like CFAI mocks. If you don’t do it the way they thought of, you’ll often find out that data was just made up poorly and is wrong. We had that at all 3 levels, they just don’t double check their mocks. Even Schweser has more reliable data in their mocks.

However, we can be sure that something like that won’t happen on the real exam. And if it did, they’d just accept both answers.