The current price of a nondividend-paying stock is 40 and the continuously compounded risk-free interest rate is

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The current price of a nondividend-paying stock is 40 and the continuously compounded risk-free interest rate is 8%. The following table shows call option premiums for 3-month European options of various exercise prices:

Exercise Price 35 40 45 Call Premium 6.13 2.78 0.97

Student A constructs a 35-45 bull spread using call options.

Student B constructs a 40-45 bear spread using put options.

Determine the three-month stock price such that Student A and Student B have the same profit, and the value of the common profit.

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Question Posted: Nov 22, 2023 08:11 AM

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The current price of a nondividend-paying stock is 40 and the continuously compounded risk-free interest rate is

Question:

Exercise Price 35 40 45 Call Premium 6.13 2.78 0.97

Step by Step Answer:

To determine the threemonth stock price at which both Student A and Student B have the same profit we need to find the breakeven point for each spread Student A constructs a 3545 bull spread using cal...View the full answer

Derivative Pricing

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