Difficulty: Hard
Category: Options & Greeks
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: options, arbitrage, box-spread, risk-free-rate, present-value
You are evaluating a box spread on a stock. The box spread consists of a long call with a strike price of K1 and a short call with a strike price of K2, combined with a long put with a strike price of K2 and a short put with a strike price of K1, where K2 > K1. All options have the same expiration date, T. Assume continuous compounding at a risk-free rate, r. What is the theoretical fair value of this box spread at initiation, ignoring transaction costs and dividends?
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