Question 3: [15 points] The following options are all European and written on the same asset...
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Question 3: [15 points] The following options are all European and written on the same asset S which does not pay dividend in the next 8 months. Identify whether the prices necessarily imply an arbitrage opportunity, and justify your answer. Note: You may use the inequalities for option prices to justify arbitrage (you are not required to create a portfolio). If there is not necessarily an arbitrage, explain why it is different from the case with arbitrage. (a) (5pts) A 65-strike-6-month call sells for $12, a 70-strike-6-month call sells for $9.5, and a 75-strike- 6-month call sells for $6. (b) (5pts) A 65-strike-6-month call sells for $12, a 70-strike-4-month call sells for $9.5, and a 75-strike- 8-month call sells for $6. (c) (5pts) A 65-strike-6-month put sells for $6, a 70-strike-4-month put sells for $9.5, and a 75-strike- 8-month put sells for $12. Question 3: [15 points] The following options are all European and written on the same asset S which does not pay dividend in the next 8 months. Identify whether the prices necessarily imply an arbitrage opportunity, and justify your answer. Note: You may use the inequalities for option prices to justify arbitrage (you are not required to create a portfolio). If there is not necessarily an arbitrage, explain why it is different from the case with arbitrage. (a) (5pts) A 65-strike-6-month call sells for $12, a 70-strike-6-month call sells for $9.5, and a 75-strike- 6-month call sells for $6. (b) (5pts) A 65-strike-6-month call sells for $12, a 70-strike-4-month call sells for $9.5, and a 75-strike- 8-month call sells for $6. (c) (5pts) A 65-strike-6-month put sells for $6, a 70-strike-4-month put sells for $9.5, and a 75-strike- 8-month put sells for $12.
Expert Answer:
Answer rating: 100% (QA)
a In this case the price of the 65strike6month call is higher than the prices of both the 70strike6month call and the 75strike6month call This violate... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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