PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 20, Problem 14PS
Put-call parity A European call and put option have the same maturity. Both are at-the-money, so that the stock price equals the exercise price. The stock does not pay a dividend. Which option should sell for the higher price? Explain.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Under the assumptions of the Black-Scholes model, which value does not affect the price of a European call option:
Select one:
a. the interest rate r
b. the spot price S
c. the strike price K
d. the return of the stock µ
e. the volatility of the stock σ
Tick all those statements on options that are correct (and don't tick those statements that are incorrect).
a. The put-call parity formula necessarily requires the assumption that the share price follows a geometric
Brownain motion.
b. In general the equation S(T) + (K − S(T))† = (S(T) – K)+ + K is valid.
An American put option should never be exercised before the expiry time.
C.
d. The Black-Scholes formula is based on the assumption that the share price follows a geometric
Brownian motion.
e.
If interest is compounded continuously then the put-call parity formula is P + S(0) = C + Ke¯T
where T is the expiry time.
Tick all those statements on options that are correct (and don't tick those statements that are incorrect).
B
a. The Black-Scholes formula is based on the assumption that the share price follows a geometric Brownian motion.
b. If interest is compounded continuously then the put-call parity formula is P+ S(0) = C + Ker where T is the expiry time.
An American put option should never be exercised before the expiry time.
d.
In general the equation S(T) +(K-S(T)) = (S(T)-K)+ +K is valid.
e. The put-call parity formula necessarily requires the assumption that the share price follows a geometric Brownain motion.
C.
Chapter 20 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 20 - Vocabulary Complete the following passage: A _____...Ch. 20 - Option payoffs Note Figure 20.12 below. Match each...Ch. 20 - Option payoffs Look again at Figure 20.12. It...Ch. 20 - Option payoffs What is a call option worth at...Ch. 20 - Option payoffs The buyer of the call and the...Ch. 20 - Option combinations Suppose that you hold a share...Ch. 20 - Option combinations Dr. Livingstone 1. Presume...Ch. 20 - Option combinations Suppose you buy a one-year...Ch. 20 - Option combinations Suppose that Mr. Colleoni...Ch. 20 - Option combinations Option traders often refer to...
Ch. 20 - Prob. 11PSCh. 20 - Option combinations Discuss briefly the risks and...Ch. 20 - Put-call parity A European call and put option...Ch. 20 - Putcall parity a. If you cant sell a share short,...Ch. 20 - Putcall parity The common stock of Triangular File...Ch. 20 - Put-call parity What is put-call parity and why...Ch. 20 - Putcall parity There is another strategy involving...Ch. 20 - Putcall parity It is possible to buy three-month...Ch. 20 - Putcall parity In April 2017, Facebooks stock...Ch. 20 - Option bounds Pintails stock price is currently...Ch. 20 - Option values How does the price of a call option...Ch. 20 - Option values Respond to the following statements....Ch. 20 - Option values FX Bank has succeeded in hiring ace...Ch. 20 - Option values Is it more valuable to own an option...Ch. 20 - Option values Youve just completed a month-long...Ch. 20 - Option values Table 20.4 lists some prices of...Ch. 20 - Option bounds Problem 21 considered an arbitrage...Ch. 20 - Prob. 30PSCh. 20 - Prob. 31PSCh. 20 - Prob. 32PS
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Consider two European call options with strike K and the same underlying non- dividend paying stock. The stock price is currently at So. Option 1 has price C₁ maturity T₁ and Option 2 has price C₂ and maturity T2, where T₂ > T₁. The risk-free interest rate is r. Use a no-arbitrage argument to prove that C₂ > C₁-arrow_forwardPart I. Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock. Part II. Indicate whether each of the following two statements below is true, false or uncertain and justify your response. It is theoretically impossible for an out-of-money European call and an in-the-money European put to be trading at the same price. Both options are written on the same non-dividend paying stock. A 3-month European put option on a non-dividend-paying stock is currently selling for $3.80. The stock price is $48.0, the strike price is $51, and the risk-free interest rate is 6% per annum (continuous compounding). There is no arbitrage opportunity in this scenario.arrow_forwardReferring to put-call parity, which one of the following alternatives would allow you to create (own) a syntheticEuropean call option? Sell the stock, buy a European put option on the same stock with the same exercise price and the same maturity, invest an amount equal to thepresent value of the exercise price in a pure-discount riskless bond Buy the stock, sell a European put option on the same stock with the same exercise price and the same matunty: short an amount equal to the presentvalue of the exercise price worth of a pure-discount riskless bond Buy the stock, buy a European put option on the same stock with the same exercise price and the same maturity; short an amount equal to the presentvalue of the exercise price worth of a pure-discount riskless bondarrow_forward
- 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 So = (1 + r)^Tarrow_forwardExplain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock.arrow_forwardWhich of the following statements is correct? As the volatility of the stock price increases (all else remaining unchanged), both European calls and puts become less valuable. The seller of an option can choose whether to post a margin or not. Consider a call and a put which are both written on the same asset, and have the same strike price and the same time-to-maturity. It is possible for the call and the put to be out-of-the-money at the same time. The intrinsic value of a European option is the value it would have if the time-to-maturity was zero. Please explain and justify your choice using your own words.arrow_forward
- Which of the following statements about European option contracts is TRUE? a. Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise. b. One can synthesise a long forward position in the underlying by being long a call and short a put c. A long call position and a short put position both involve buying the underlying and so are equivalent d. The price of an option can be obtained by computing the true probabilities of each state of nature, working out the expected option payoff across those states and then discounting back to the present.arrow_forwardBecause of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same. Group of answer choices True Falsearrow_forwardA) Does this model satisfy the no-arbitrage assumption? B) Calculate the risk-neutral probabilities of up and down movements in the share price. C) Determine the no-arbitrage price of a European call option on the share with strike price K=70 and expiry time T=2.arrow_forward
- State and prove the Put-Call Parity Theorem that gives the relation between a European Call and a Put option price where the options are written on the same stock, same time to maturity and have the same exercise price.arrow_forward1. Consider a family of European call options on a non - dividend - paying stock, with maturity T, each option being identical except for its strike price. The current value of the call with strike price K is denoted by C(K) . There is a risk - free asset with interest rate r >= 0 (b) If you observe that the prices of the two options C( K 1) and C( K 2) satisfy K2 K 1<C(K1)-C(K2), construct a zero - cost strategy that corresponds to an arbitrage opportunity, and explain why this strategy leads to arbitrage.arrow_forwardPayoff from entering into a forward contract does the buyer have more to gain going long than the seller has to lose going short, profits if the price of the underlying at expiration exceeds the forward price and/or gains from owning the underlying versus owning the forward contract are equivalent? Explain why one or more of the options above are correct. and why, if any of the remaining options are incorrect.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
Accounting for Derivatives Comprehensive Guide; Author: WallStreetMojo;https://www.youtube.com/watch?v=9D-0LoM4dy4;License: Standard YouTube License, CC-BY
Option Trading Basics-Simplest Explanation; Author: Sky View Trading;https://www.youtube.com/watch?v=joJ8mbwuYW8;License: Standard YouTube License, CC-BY