Financial Market

a) Demonstrate how a butterfly spread can be constructed using either put or call options and discuss the circumstances under which a trader might construct such a strategy.
(60 marks)

b) Use the put-call parity relationship to demonstrate that a butterfly spread using calls should cost the same as a butterfly spread using puts, when the underlying asset, strike price and maturity dates of each spread are the same.
(40 marks)

*Using internet sources i.e. website are not allowed in this paper.

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