What is produced by a box spread?

A box spread is a trading strategy that consists of taking a long position in a bull call spread and a short position in a bear put spread with the same strike prices. The key characteristic of a box spread is that it replicates a risk-free payoff.

When a trader establishes a box spread, they lock in a range of exercise prices that essentially guarantees a profit equivalent to the difference between these two strike prices, minus any transaction costs. This occurs because the combination of positions effectively guarantees that at expiration, the outcome will equate to a cash flow equal to the difference in the exercise prices, assuming efficient markets.

This risk-free nature of the payoff is the reason why the box spread is utilized, particularly by arbitrageurs looking to capture mispricing in options markets. Therefore, the correct answer rightly identifies that a box spread produces a risk-free payoff of the difference in exercise prices.