Consider a stock that pays no dividends on which a futures contract, a call option, and a
Question:
Consider a stock that pays no dividends on which a futures contract, a call option, and a put option trade. The maturity date for all three contracts is T, the exercise price of the put and the call are both X, and the futures price is F. Show that if X = F, then the call price equals the put price. Use parity conditions to guide your demonstration.
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
The putcall parity rel...View the full answer
Related Video
A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.
Students also viewed these Accounting questions
-
A stock that pays no dividend currently trades for $100. Assume thestock price has an up factor of 1.35 and a down factor of 0.74 over the next year, and the risk-free rate is 5.15%. Consider a call...
-
Consider a stock that is currently selling for $50. In one year from now, the value of the stock is expected to be either $45 or $60 (with equal probability). Assume that the risk-free interest rate...
-
Consider a stock that is not yet paying dividends. You expect the company to begin paying dividends in 6 years. The first dividend (D6) will be $1. For two years after that, dividends will increase...
-
Determine whether or not it is possible to cold work brass so as to give a minimum Brinell hardness of 120 and at the same time have a ductility of at least 20%EL. Justify your decision.
-
Let d represent the distance between the point (5, - 3) and any point, (x, y), on the parabola y = 0.5x2 + 1. a. Write an equation for d in terms of x. b. What is the minimum distance? What are the...
-
Various types of attachments can be used with the shop vac shown in Video V5.2. Two such attachments are shown in Fig. P5.20-a nozzle and a brush. The flowrate is \(1 \mathrm{ft}^{3} / \mathrm{s}\)....
-
A PV battery system has an end-to-end efficiency of \(77 \%\). The system is used to run an all-AC load that is run only at night. The charge controller efficiency is \(96 \%\) and the inverter...
-
The Symantek Division produces software. It has $300,000 of total assets, earns $45,000 per year, and generates $45,000 per year of cash flow. The cost of capital is 15 percent. Each year, Symantek...
-
A sphere has a volume charge density of 12.5 nC/m. If the sphere's radius increases by a factor of 2 (but the total charge stays the same), what is the new volume charge density?
-
Salma wanted to sell her house and advertised it in the local newspaper on Monday for 400,000. Eshan saw the advertisement and rang Salma to make an appointment to see the house. During the He liked...
-
Suppose the value of the S&P 500 stock index is currently 1,100. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what should the 1-year maturity futures price...
-
It is now January. The current interest rate is 5%. The June futures price for gold is $946.30, whereas the December futures price is $960.00. Is there an arbitrage opportunity here? If so, how would...
-
A Treasury bill purchased in December 2015 has 55 days until maturity and a bank discount yield of 2.48 percent. What is the price of the bill as a percentage of face value? What is the bond...
-
Suppose Heat Miser Air Conditioner Company engaged in the following transactions during June of the current year: June 3 Purchased inventory on credit terms of 1/10 net eom (end of month $1,600) 9...
-
Find a solution to the problem that goes beyond just minimizing cost. Prepare a short write-up that describes the process you went through to find your solution and that justifies why you think it is...
-
The following data from the just completed year are taken from the accounting records of Mason Company: Sales $ 6 5 4 , 0 0 0 Direct labor cost $ 8 9 , 0 0 0 Raw material purchases $ 1 3 3 , 0 0 0...
-
1. Apple Orchard Cafe has 12 FTEs, each employee is 1 FTE, 6 of these get paid $10/hour and 6 get paid $15/hour, and its revenue for April is $180,000. What should its daily total payroll cost be? (5...
-
Select two consecutive days (48 hours) where you will unplug from technology and not use the following electronic means for leisure: cell phones, television, internet, ipods, mp3 players, game...
-
MacTavish plc has four geographical segments (based on the location of the entitys operations). The following information relates to the year ended 31 March 2010: In addition to the external revenue...
-
A stock has had returns of 8 percent, 26 percent, 14 percent, 17 percent, 31 percent, and 1 percent over the last six years. What are the arithmetic and geometric average returns for the stock?
-
Construct a cumulative frequency table for the tally table you constructed in question 23. Question 23 Use the data given in question 22 to construct a tally table for the grades. Use intervals 5160,...
-
Discuss the alternative concepts that can be employed when setting the discounting rate for economic analysis in the public sector. What is the authors' final recommendation for setting this rate?
-
What is the essential difference between the conventional and modified versions of the benefit-cost ratio? Is it possible for these two measures to provide conflicting recommendations regarding...
-
List the potential costs, benefits, and disbenefits that should be considered when one is evaluating a nuclear power plant construction.
-
Make recommendations for Under Armour's target group (Active lifestyle customers: who values Under Armour apparel's comfortable, breathability and moisture-wicking features, and digital fitness app)...
-
To create 3 scenarios (positive, neutral and negative) for the development of the restaurant. Include the following important factors in your assessments: border trade as one of the most important...
-
Joanne bought a gift for her friend's birthday from an online website. The service provider failed to deliver the gift on the day it had promised. To compensate, the service provider provided coupons...
Study smarter with the SolutionInn App