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 29PS
Option bounds Problem 21 considered an arbitrage opportunity involving an American option. Suppose that this option was a European call. Show that there is a similar possible arbitrage profit.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (ie. riskless profit). Assume the interest rate r=0 so present value calculations are unnecessary.
Suppose that C is the price of a European call option to purchase a security whose present price is S.Show that if C > S then there is an opportunity for arbitrage (i.e. riskless profit). You may assume theinterest rate is r = 0 so that present value calculations are unnecessary.
Which of the following statements about European option contracts is true?
Question 2Answer
a.
Typically American options are cheaper than otherwise similar European options due to the uncertainty regarding the date of exercise.
b.
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.
c.
A long call position and a short put position both involve buying the underlying and so are equivalent
d.
One can synthesise a long forward position in the underlying by being long a call and short a put
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
- Suppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (i.e. risk-less profit). You may assume the interest rate is r=0 so that the present value calculations are unnecessary.arrow_forwardThe value of a European put option can be either directly or inversely to a. Time to expiry b. volatility of the underlyingarrow_forwardImagine a situation where European options on some underlying stock have the following relationship. p+S > c+ K*exp(-rT). (a) Describe the arbitrage opportunities that are available with an example. (b) Now change those options to American-style options. Does the arbitrage strategy still work? Explain your answer.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_forwardThe bid-ask spread on an exchange rate implies _______. A. the transaction cost of foreign exchange B. the forward premium C. the currency option premium D. how an exchange rate will changearrow_forwardThe exposure of the call option to changes in the exchange rate is given by Cu-Ca A= Su- Sa where Cu is the value of the call in the up state and Ca is its value in the down state. Calculate the exposure of the call. Explain what is meant by exposure.arrow_forward
- What is a REIT What are the advantages and disadvantages of REITs List and Describe the different types of REITs What is an OPTION Differentiate between a PUT and a CALL OPTION List and Describe the different types of OPTIONS What is a REPO What are the advantages and disadvantages of REPOS List and Describe the different types of REPOS What is the formula for calculating REPO RATE Define (a) Market Risk (b) Interest Rate Risk (c) Commodity Risk (d) Currency Riskarrow_forwardConsider the Black-Scholes model. In class, we derived the formula for the price of the European Call option. (a) Using the formula for the European Call option, calculate the Greek Delta. (b) Using the formula for the European Put option, calculate the Greek Delta.arrow_forwardDerive the Crank-Nicolson's finite difference method to solve the Black-Scholes-Merton partial differential equation for pricing an American put option. Note: Make sure you have described the grid, discretization of various derivatives and then combined them suitably to get a scheme.]arrow_forward
- Explain the random walk model for exchange rate forecasting. Can it be consistent with technical analysis?arrow_forwardUnder 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 σarrow_forwardAn option that gives the option buyer the right to buy the commodity or financial instrument specified in the contact at the exercise price is called:* A. an American option B. a European option C. a call option D. a put optionarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
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