For two call options on the same underlying asset and same time to maturity, therelationship c(K1) – c(K2) ≤ K2 – K₁, for K1 < K2 must hold. Otherwise, thereis an arbitrage opportunity. Given the following option prices:StrikePremium645.0063.20650.0099.00655.0057.5089.85660.00Among the four calls, there is one pair for which the above relationship is not hold andthus, one can make arbitrage. To do so, one should buy option with strike pricetype your answer..., and sell option with strike pricetype your answer...The minimum profit is type your answer...andthe maximum profit is type your answer...

SolutionLooking at the table, we can see that the call option with a strike price of $650 (K2) has a…

Answered: For two call options on the same…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A call option has a strike price of MYR3.00/SGD. If the option is exercised before maturity, what price in the followings would maximize gain? a. MYR3.00/SGD. b. MYR2.90/SGD. c. MYR3.05/SGD. d. MYR2.95/SGD.
An up-and-out barrier call option with barrier B, strike price K and exercise time T has payoff H(T) = (S(T) − K) + if max {S(t)| 0 ≤ t ≤ T} < B, 0 otherwise, that is, the payoff is that of a call option if the underlying stock price does not reach or exceed the barrier B at any time up to and including time T, and 0 otherwise. For an up-and-out barrier call option with barrier B = 140, strike price K = 90 and exercise time T = 3 in the binomial model with parameters U = 0.2, D = −0.1, R = 0.1 and S(0) = 100 compute the following. (a) The option price at time 0;
Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if S0 = (1 + r)T..
Question 1. Suppose t ≤ T1 ≤ T2 ≤ T3, where t is the current time, and ∆ > 0. Recall that Z(T1, T2) is the price at time T1 of a ZCB with maturity T2 and F(T1, T2, T3) is the forward price at time T1 for a forward contract with maturity T2 on a ZCB with maturity T3. a) For each of the pairs of A and B in the table, choose the most appropriate relationship out of ≥, ≤, = , ?, where ? means the relationship is indeterminate. Give brief reasoning. A ≥, ≤, = , ? B (i) Z(t, T1) 1 (ii) Z(T1, T1) 1 (iii) Z(t, T2) Z(t, T3) (iv) Z(T1, T2) Z(T1, T3) (v) Z(T1, T3) Z(T2, T3) (vi) Z(T1, T1 + ∆) Z(T2, T2 + ∆) (vii) F(t, T1, T2) F(t, T1, T3) (viii) F(t, T1, T3) F(t, T2, T3) (ix) limT→∞ Z(t, T) 0 Hint: Remember that at current time t, F(t, ·, ·) is known but Z(T, ·) is a random variable. b) What can you say about interest rates between T1 and T2 if i) Z(t, T1) = Z(t, T2)? ii) Z(t, T1) > 0 and Z(t, T2) = 0?
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