Three call options on the same asset with the same maturity are available in the market with exercise prices: X1 = $100, X2 = $110, and X3 = $120 respectively.
The three call options are priced at $2, $3 and $7.
(You have to determine which of the three call options cost $2, $3 and $7 respectively)
(a) Show how a butterfly spread option trading strategy can be executed using the above call options.
(b) What market conditions would an investor using a butterfly spread trading strategy be expecting?
(c) Sketch the payoff and profit diagram for the butterfly spread.
(d) Calculate the maximum payoff and maximum profit.
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