Suppose the risk-free interest rate per annum is r. Consider two portfolios: Portfolio A: consists...
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Suppose the risk-free interest rate per annum is r. Consider two portfolios: • Portfolio A: consists of . 1. a European call option of the AIA stock at strike price K, with an expiration date = 1 year 2. an amount of money $K/(1+r) in a risk-free savings account Portfolio B: consists of 1. a European put option of the AIA stock at strike price K, with an expiration date = 1 year 2. one share of the AIA stock There are two possible scenarios on the expiration date: "up" scenario: the price of the AIA stock S > K. "down" scenario: the price of the AIA stock S < K... (a) Compute the net worth of Portfolio A on the expiration date in the "up" as well as in the "down" scenario. (b) Compute the net worth of Portfolio B on the expiration date in the "up" as well as in the "down" scenario. (c) Based on (a) and (b), what is the relation between the fair present price of the European call options and the fair present price of the European put options? Suppose the risk-free interest rate per annum is r. Consider two portfolios: • Portfolio A: consists of . 1. a European call option of the AIA stock at strike price K, with an expiration date = 1 year 2. an amount of money $K/(1+r) in a risk-free savings account Portfolio B: consists of 1. a European put option of the AIA stock at strike price K, with an expiration date = 1 year 2. one share of the AIA stock There are two possible scenarios on the expiration date: "up" scenario: the price of the AIA stock S > K. "down" scenario: the price of the AIA stock S < K... (a) Compute the net worth of Portfolio A on the expiration date in the "up" as well as in the "down" scenario. (b) Compute the net worth of Portfolio B on the expiration date in the "up" as well as in the "down" scenario. (c) Based on (a) and (b), what is the relation between the fair present price of the European call options and the fair present price of the European put options?
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aIn the up scenario the net worth of Portfolio A is S K This is because the call option will be wort... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,
Posted Date:
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