Question: Hello, I need help understanding how to solve the following questions regarding options. Please show all work and explain steps if possible. Thank you! Suppose:
Hello, I need help understanding how to solve the following questions regarding options. Please show all work and explain steps if possible. Thank you!
Suppose: S0 = 63, X1 = 60, X2 = 65, T1 = .0959, T2 = .1507, r1 = .0235, r2 = .0248
For each of the following conditions on option price,
a) Show the boundary condition that has been violated;
b) State the positions (label them carefully) you would take today to arbitrage, show the cash flow from each position taken, show the net cash flow from the positions taken;
c) State the positions (label them carefully) you would take to unwind the arbitrage given asset prices, show the cash flow from each, show the net cash flow from unwinding the arbitrage positions.
- Ce(S,T2,X1) = 3.18 and ST2 = 58.25, ST2 = 64.5
- Pa(S,T1,X2) = 3.68 and Pa(S,T2,X2) = 3.61; and ST1 = 61.5, ST1 = 66.25
- Pe(S,T2,X1) = 2.39 and Pe(S,T2,X2) = 2.35; and ST2 = 57.5, ST2 = 62.25, ST2 = 68
- Pe(S,T2,X1) = .72 and Ce(S,T2,X1) = 3.86; and ST2 = 56.5, ST2 = 63, ST2 = 66.5
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