Past exam of the martingales and financial mathematics course of the University of Oxford / 2008 / B / 6 / i / c / Solution

The difference between the high-strike and low-strike put payoffs satisfiesIf its price were negative, buying the nonnegative-payoff spread would generate an arbitrage. If its price exceeded the discounted maximum payoff, selling it and buying a bond for that maximum would generate an arbitrage. Thus the sharper inequality isFor the positive-rate convention of the paper this implies the printed upper bound $K_1-K_2$. If rates were allowed to be negative, the undiscounted upper bound need not hold; the discounted bound is the correct rate-independent statement. This distinction is about the stated financial assumptions, not a change to the transcribed inequality.