Table 23.2 shows call options on Google stock with the same exercise date in January 2011 and

Question:

Table 23.2 shows call options on Google stock with the same exercise date in January 2011 and with exercise prices $430, $460, and $490. Notice that the price of the middle call option (with exercise price $460) is less than halfway between the prices of the other two calls (with exercise prices $430 and $490). Suppose that this were not the case. For example, suppose that the price of the middle call were the average of the prices of the other two calls. Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in January may be positive but cannot be negative despite the fact that your net outlay today is zero. What can you deduce from this example about option pricing?

Table 23.2 shows call options on Google stock with the
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Fundamentals of Corporate Finance

ISBN: 978-0078034640

7th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

Question Posted: