214 Mathematics for Finance
The bull spread combined with risk-free will clearly be preferable to the other
investments as it has the highest market price of risk and lowest VaR.
Exercise 9.10
Check the above computations and consider a modification such that
the bull spread is constructed by buying a call with strike price $60 and
selling a call with strike price $62. Compute the expected return, risk
and VaR.Exercise 9.11
Within the framework of the binomial model used above consider an
analyst who has reasons to believe that the stock price will fall, but no
more than 20% after 20 days. For a bear spread with strikes $56 and $58
constructed from put options compute the expected return, risk, and
VaR for the worst possible outcome.