Assume you are long the HSI 28400 - 28600 (Bullish spread)

Assume you are long the HSI 28400 - 28600 (Bullish spread) April Call spread and short the HSI 28400 - 28600 (Bearish spread) June call spread. Assume that a week before the April expiration HSI is at 29600 and that the current (low) interest rates and current volatility will stay the same. What should be the value of the combined position, in index points?

Expert Solution

To calculate the value of the combined position, we need to calculate the value of each spread separately and then subtract the value of the June bearish spread from the April bullish spread.

First, let's calculate the value of the April bullish spread:

The long call option with a strike price of 28400 will be in the money by 1200 points (29600 - 28400) and the short call option with a strike price of 28600 will be out of the money. Thus, the value of the April bullish spread will be:

Value of long call option with strike price 28400 = max(29600 - 28400, 0) = 1200
Value of short call option with strike price 28600 = max(0, 0) = 0

Therefore, the value of the April bullish spread will be 1200 index points.

Next, let's calculate the value of the June bearish spread:

The short call option with a strike price of 28400 will be in the money by 1200 points (29600 - 28400) and the long call option with a strike price of 28600 will be out of the money. Thus, the value of the June bearish spread will be:

Value of short call option with strike price 28400 = max(0, 1200 - (29600 - 28400)) = 0
Value of long call option with strike price 28600 = max(0, 0) = 0

Therefore, the value of the June bearish spread will be 0 index points.

Finally, to calculate the value of the combined position, we subtract the value of the June bearish spread from the April bullish spread:

Value of combined position = Value of April bullish spread - Value of June bearish spread
= 1200 - 0
= 1200 index points

Therefore, the value of the combined position will be 1200 index points

the combined position will be 1200 index points

Junaid answered 1 year ago

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