butterfly.spread: Butterfly Spread

In FinancialMath: Financial Mathematics for Actuaries

Description

Gives a table and graphical representation of the payoff and profit of a long butterfly spread for a range of future stock prices.

Usage

butterfly.spread(S,K1,K2=S,K3,r,t,price1,price2,price3,plot=FALSE)

Arguments

S	spot price at time 0
K1	strike price of the first long call
K2	strike price of the two short calls
K3	strike price of the second long call
r	continuously compounded yearly risk free rate
t	time of expiration (in years)
price1	price of the long call with strike price K1
price2	price of one of the short calls with strike price K2
price3	price of the long call with strike price K3
plot	tells whether or not to plot the payoff and profit

Details

Stock price at time t =S_t

For S_t<=K1: payoff =0

For K1<S_t<=K2: payoff =S_t-K1

For K2<S_t<K3: payoff =2*K2-K1-S_t

For S_t>=K3: payoff =0

profit = payoff+(2*price2 - price1 - price3)*e^{r*t}

Value

A list of two components.

Payoff	A data frame of different payoffs and profits for given stock prices.
Premiums	A matrix of the premiums for the call options and the net cost.

Note

K2 must be equal to S.

K3 and K1 must both be equidistant to K2 and S.

K1 < K2 < K3 must be true.

See Also

butterfly.spread.bls

option.call

Examples

butterfly.spread(S=100,K1=75,K2=100,K3=125,r=.03,t=1,price1=25,price2=10,price3=5)

FinancialMath documentation built on May 1, 2019, 11:16 p.m.