Question: Why does a stock index option sell at a lower price than the cost of a portfolio of options on the constituent stocks? (Assume that

Why does a stock index option sell at a lower price than the cost of a of options on the constituent stocks? (Assume that the index call option and the of call options control the same dollar value of stocks.)

Step by Step Solution

★★★★★

3.43 Rating (182 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The stock index option is affected by the diversification between the securitie... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

801-B-A-I (8041).docx

120 KBs Word File

Students Have Also Explored These Related Accounting Questions!

What advantage does purchasing a stock index option offer over buying options on individual securities?

Lower-of-Cost-or-Market Ogala Corporation purchased a significant amount of raw materials inventory for a new product that it is manufacturing. Ogala uses the lower-of-cost-or-market rule for these...

Steel Company, a wholesaler that has been in business for two years, purchases its inventories from various suppliers. During the two years, each purchase has been at a lower price than the previous...

22. Why does a stock index option sell at a lower price than the cost of a portfolio of options on the constituent stocks (assuming that the index call option and the portfolio of call options...

4. Option pricing model. Binomial approach Aaa Lean Corp. (Ticker La d uction technology company is considered to be one of the east risky companies in the education sector Investors trade in for...

Option Pricing model 4. Option pricing model - Binomial approach Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education...

Please answer the questions 4. Option pricing model Binomial approach Aa Aa Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the...

Ch 08: Assignment - Financial Options and Applications in Corporate Finance 3. Option pricing model - Binomial approach Learn Corp. (Ticker: LC), an education technology company, is considered to be...

Case Analysis 1. Compute the yield to maturity of Land'o'Toys' bonds before the purchase announcement and use it to determine the likely current bond rating. (Compare YTM to the table on p. 269)....

4. Option pricing model - Binomial approach Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade...

In the Joys Daycare BE example in the chapter, how would a $1,000 annual advertising expenditure impact the business break-even point?

What are the processes of management?

16.30 Using the average baseball salary from 2000 through 2019 data for Problem 16.18 on page 602 (stored in MLB Salaries ), a. fit a third-order autoregressive model to the average baseball salary...

Show the following: (a) An M/M/1 is always better with respect to L than an M/M/2 with the same . (b) An M/M/2 is always better than two independent M/M/1 queues with the same service rate but each...

A convertible bond has a $1,000 face value and a conversion ratio of 36. If the stock price is $42, what is the conversion value?

A company just sold a convertible bond at a par value of $1,000. If the conversion price is $58, what is the conversion ratio?

Peaceful Cruises wants to build a new cruise ship that has an initial investment of $ 4 5 0 million. It is estimated to provide an annual cash flow over the next 2 0 years of $ 5 8 million per year....

Suppose that an investor has 8 years investment horizon. The investor is considering a 15-year semi-annual coupon bond selling at par and having a coupon rate of 9%. The investor expectations are as...

0 1 You are paying an apartment for lease at $400 per month for 25 months, monthly interest rate is 12.8%. The first payment is made today. What is the value of your 25 months apartment lease today?...