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Thread: A little MFE question

  1. #1
    Actuary.com - Level I Poster
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    A little MFE question

    I am doing lesson 10 in ASM MFE manual. For a calendar spread of buying a call option (A) and selling a call option (B), should the value(gain) at the initial position equal to Value(A)-V(B), or V(B)-V(A)?

    I found the manual uses both ways in similar questions, which is confusing..

    Thank you!
    Last edited by zmw; April 14th 2007 at 11:29 AM.

  2. #2
    Actuary.com - Level II Poster
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    Hi,

    I think u should wait a bit...
    I am now on lessen 6, reaching to that I might be able to help u...

    Best,
    Last edited by atabd; April 10th 2007 at 02:53 AM.

  3. #3
    Actuary.com - Level VI Poster
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    Quote Originally Posted by zmw View Post
    I am doing lesson 10 in ASM MFE manual. For a calendar spread of buying a call option (A) and selling a call option (B), should the value(gain) at the initial position equal to Value(A)-V(B), or V(B)-V(A)?

    I found the manual uses both ways in similar questions, which is confusing.

    Thank you!
    I'm not currently studying for MFE, so I'm not entirely sure of the definition of "calendar spread". But if you're asking which difference should represent the value of "gain", I would interpret "gain" to be "how much you received from the sale, in excess of how much you bought it for." So, V(B) - V(A) = gain.

  4. #4
    Actuary.com - Level I Poster
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    Quote Originally Posted by zmw View Post
    I am doing lesson 10 in ASM MFE manual. For a calendar spread of buying a call option (A) and selling a call option (B), should the value(gain) at the initial position equal to Value(A)-V(B), or V(B)-V(A)?

    I found the manual uses both ways in similar questions, which is confusing.

    Thank you!
    i remember having trouble about the same thing.
    The understanding that I came to was differentiating between the value, and cash received.

    If you buy A and sell B. Then initially, the value of the portfolio, is the V(A)-V(B), since you own A, and you have sold your ownership of B.

    does that make sense?

    This has worked for me, since throughout this type of question, we look at the value of the portfolio, and not the cash flow.

    note 10.9 in the exercise, which is also on calendar spreads, has a replacement errata solution.

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