Question
A) What should be the price of the call option? B) Assume that the call option on Apple with strike price $90 and maturity in
A) What should be the price of the call option?
B) Assume that the call option on Apple with strike price $90 and maturity in one year is currently trading at $17. You immediately tell your broker that you found a different price in part (a), but he replies that you must be wrong: markets should be efficient and the price you computed in point (1) is useless. Do you agree with him or not? Construct an arbitrage portfolio to support your answer.
C) Assume now that there is a trading fee of 8 cents per option or per stock you buy/sell. Would your answer to part (b) change?
Consider the following securities and market prices
Security Maturity(Years) Strike Price(Today)
Apple Stock 1 - $95
Put on Apple stock 1 $90 $10
Call on Apple stock 1 $90 ?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Call Option Price and Market Efficiency A Call Option Price We cannot determine the exact price of the call option using only the information providedThe price of an option depends on several factors ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started