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Math Help - Cost of spread question

  1. #1
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    Cost of spread question

    Q. Use put-call parity to show that the cost of a butterfly spread created from European puts is identical to the cost of a butterfly spread created from European calls.

    Hi everyone,
    My problem with this question is what they mean by 'cost' of the spread. Is that the total you're paying for the options to create the spread?
    And, if so, won't the put-call parity rule only work if you are buying puts and calls on the same options?

    Thanks for any help!
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  2. #2
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    My problem with this question is what they mean by 'cost' of the spread. Is that the total you're paying for the options to create the spread?
    I would assume so, unless you have previously been told something different. If you get the desired answer using this definition that will be a good sign...

    And, if so, won't the put-call parity rule only work if you are buying puts and calls on the same options?
    Put call parity (as i was taught it) applies to the values of Put and call options written on the same underlying asset. It doesn't matter what the underlying asset is, as long as its the same for the call and put options you are comparing. There is nothing in the question to suggest this is not the case.

    Even if it wasn't the case for this question, In principle put/call parity would also work where the underlying assets were different but had sufficiently identical payout characteristics, but i doubt that's what you were getting at.
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