The following option prices were observed for calls and puts on a stock for the trading day of July 6 of particular year. Use this information in problems through 14. The stock was priced at 165.13. The expirations were July 17, August 21, and October 16. The continuously compounded risk-free rates asso- ciated with the three expirations were 0.0503, 0.0535, and 0.0571, respectively. Unless otherwise indicated, assume that the options are European.
The following option prices were observed for calls and puts on a stock for the trading day of July 6 of particular year. Use this information in problems through 14. The stock was priced at 165.13. The expirations were July 17, August 21, and October 16. The continuously compounded risk-free rates asso- ciated with the three expirations were 0.0503, 0.0535, and 0.0571, respectively. Unless otherwise indicated, assume that the options are European.
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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Let the standard deviation of the continuously compounded return on the stock is 21 percent. Ignore dividends. Respond to the following.
a) What is the theoretical fair value of the October 165 call?
b) Based on your answer in part a, recommend a riskless strategy.
c) If the stock price decreases by $1, how will the option position offset the loss on the stock
Transcribed Image Text:The following option prices were observed for calls
and puts on a stock for the trading day of July 6 of a
particular year. Use this information in problems 7
through 14. The stock was priced at 165.13. The
expirations were July 17, August 21, and October 16.
The continuously compounded risk-free rates asso-
ciated with the three expirations were 0.0503,
0.0535, and 0.0571, respectively. Unless otherwise
indicated, assume that the options are European.
Strike Jul
155
160
165
170
Calls
Aug
10.50 11.75
6.00
2.69
0.81
Oct
14.00
8.13 11.13
5.25
8.13
3.25
6.00
Jul
0.19
0.75
2.38
5.75
Puts
Aug
1.25
2.75
4.75
7.50
Oct
2.75
4.50
6.75
9.00
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