t) be the prices at time t of two European call options on the same
non-dividend paying stock with price S, with same expiration T and
with strike prices K1 and K2, respectively. Assume that K1 < K2.
(i) Explain why c1 − c2 is a solution of the Black-Scholes PDE.
(ii) By considering c1(ST , T) − c2(ST , T) deduce that 0 ≤ c1(St ,
t) − c2(St , t) ≤ (K2 − K1)e −r(T −t) (Hint: You need to construct
arbitrage argument above in the left and right hand sides of the
inequalities.)
- Math Finance And Stochastic Problem Let C1 S T And C2 S T Be The Prices At Time T Of Two European Call Options On T 1 (188.46 KiB) Viewed 24 times