A Financial Institutions decided to create a protected note on stock by offering investors a discount bond along with bull spread created from calls. The risk-free rate is 5% and the stock price volatility is 30%. The low-strike-price option in the bull spread is at the money. What is the maximum ratio of the high strike price to the low strike price in the bull spread? And what mechanism will be followed in bear spread?

Question 2

Suppose the price of call option is $18.35 and the and concurrently price of put option is $11.40 for the stock. In this scenario the strike price is $120 in case of call option and $130 in case of put option and risk-free rate is 4.5% with the basis on continuous compounding in 1 year. Develop the synthetic option in both call option and put option and identify coat. Suppose prevailing stock price is $120 then identify any arbitrage opportunities.

Answer rating: 100% (QA)

Develop the synthetic option in both call option and put option and identify coat ANS WER The synthe... View the full answer