Suppose call and put prices are given by
What no-arbitrage property is violated? What spread positionwould you use to effect arbitrage? Demonstrate that the spread position is an arbitrage.
Answer to relevant QuestionsLet S = $100, K = $105, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = a. What are the premium, ∆ and B for a European call? b. What are the premium, ∆ and B for a European put? Let S = $40, K = $40, r = 8% (continuously compounded), σ = 30%, δ = 0, T = 0.5 year, and n = 2. a. Construct the binomial tree for the stock. What are u and d? b. Show that the call price is $4.110. c. Compute the prices ...Suppose the S&P 500 futures price is 1000, σ = 30%, r = 5%, δ = 5%, T = 1, and n = 3. a. What are the prices of European calls and puts for K = $1000? Why do you find the prices to be equal? b. What are the prices of ...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? Compute the 1-year forward price using the 50-step binomial tree in Problem 11.13.
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