# Question: In this problem we consider whether parity is violated by

In this problem we consider whether parity is violated by any of the option prices in Table 9.1. Suppose that you buy at the ask and sell at the bid, and that your continuously compounded lending rate is 0.3% and your borrowing rate is 0.4%. Ignore transaction costs on the stock, for which the price is $168.89. Assume that IBM is expected to pay a $0.75 dividend on August 8, 2011. Options expire on the third Friday of the expiration month. For each strike and expiration, what is the cost if you:

a. Buy the call, sell the put, short the stock, and lend the present value of the strike price plus dividend (where appropriate)?

b. Sell the call, buy the put, buy the stock, and borrow the present value of the strike price plus dividend (where appropriate)?

a. Buy the call, sell the put, short the stock, and lend the present value of the strike price plus dividend (where appropriate)?

b. Sell the call, buy the put, buy the stock, and borrow the present value of the strike price plus dividend (where appropriate)?

## Relevant Questions

Consider the June 165, 170, and 175 call option prices in Table 9.1. a. Does convexity hold if you buy a butterfly spread, buying at the ask price and selling at the bid? b. Does convexity hold if you sell a butterfly ...The price of a 6-month dollar-denominated call option on the euro with a $0.90 strike is $0.0404. The price of an otherwise equivalent put option is $0.0141. The annual continuously compounded dollar interest rate is 5%. a. ...Let S = $100, K = $95, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 1 year, and n = 3. a. Verify that the binomial option price for an American call option is $18.283. Verify that there is never early exercise; ...Let S = $100,K = $95, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = 1. a. Verify that the price of a European call is $16.196. b. Suppose you observe a call price of $17. What is the arbitrage? c. Suppose you ...Repeat the option price calculation in the previous question for stock prices of $80, $90, $110, $120, and $130, keeping everything else fixed. What happens to the initial option _ as the stock price increases?Post your question