This is more of a general wondering out of curiosity.
Box spread gives you cash return (i.e. risk-free rate). So in real life, why would anyone need to construct a box spread? What is it used for?
Any examples? Thanks.
When market are efficient and aligned with market expectations a box spread will yield risk free rate.
If options are mispriced, there exist arbitrage opportunities to construct a box spread which will yield a return not equal to risk free rate.
It’d be used only with mispriced options: you’d earn more than the risk-free rate.
In one simple word: ARBITRAGE.
Sometime put on with American options
in hope counterparty will not early exercise at optimum point
To all responders,
Firstly, thanks!
But if you have an arbitrage opportunity, just construct an arbitrage portfolio using put-call parity by going long or short one call and one put (accordingly) to lock in the risk-free profit.
Why use TWO calls and TWO puts to exploit the arbitrage when one each should be sufficient? No?
You’re welcome.
That would also require an investment (long or short) in the underlying.
Generally, options are cheaper to buy and sell than the underlying is.
Box spread? Giggidy.