Microsoft shares are currently trading at $100. The price of a two-year call option on Microsoft,...
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Microsoft shares are currently trading at $100. The price of a two-year call option on Microsoft, struck at K = 80, is $30. The continuously-compounded risk-free rate of interest is 5%. (a) How much should a two-year put on Microsoft, struck at K = 80, cost? (b) Carefully explain how you could exploit a two-year put, struck at K = 80, that was trading at $4. Be sure to demonstrate what the corresponding cash flows would be (i) today and (ii) at maturity. Microsoft shares are currently trading at $100. The price of a two-year call option on Microsoft, struck at K = 80, is $30. The continuously-compounded risk-free rate of interest is 5%. (a) How much should a two-year put on Microsoft, struck at K = 80, cost? (b) Carefully explain how you could exploit a two-year put, struck at K = 80, that was trading at $4. Be sure to demonstrate what the corresponding cash flows would be (i) today and (ii) at maturity.
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