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Box Spread

March 3, 2018

A box spread is a combination of a bull spread and a bear spread. Buy a call with a strike price X1 and sell a call with a strike price X2. Buy the put with exercise price X2 and sell the put with exercise price X1.

Valuation at expiration: Vt = X2 – X1

Profit: ∏ = X2 – X1 – (C1-C2+P2-P1)

No loss is possible given fair option prices thus the transaction always earns the risk-free rate.

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