The current price of one share of stock is 70.00. The stock pays no dividends. The risk-free rate is 3%. One year call and put options on the stock are available for various strike prices. Mr. Smith observes the following prices of the one year options:
Call with strike price K1 = 6.50
Call with strike price K2 = 2.00
Put with strike price K1 = 1.03463
Put with strike price K2 = 3.32775
Smith buys a call spread consisting of one long call with a strike price of K1 and one short call with a strike price of K2. (K2 > K1).
What is the maximum possible payoff of Smith’s portfolio?
What is the minimum profit of Smith’s portfolio?