problemset2 - Problem Set 2 Ec 136 Fall 2009 This problem...

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Problem Set 2 Ec 136, Fall 2009 This problem set is due on September 17, Thursday, in class. Sorry, no late problem sets are accepted! All students must submit problem sets individu- ally. Please write your name, section time and GSI on the front page of your solution. 1. Puts and calls This exercise asks you to test put-call parity in the data. (a) Lecture 4 (see www.econ.berkeley.edu/~szeidl/ec136/lecture4.pdf) contains option quotes for Microsoft from September 3, 2009. Verify the put-call parity condition for the options with the following strike prices: $22, $24, $26. Use the bid prices for both the call and put options, and assume that R f = 0 . Note, the price of Microsoft on September 3 was $24.11. Do you °nd deviations from put-call parity? What is your arbitrage portfolio for the options with strike price $26? (b) What is wrong with using the bid prices for both the put and the call? If you actually want to engage in the arbitrage trade for the option with strike $26 from (a), would you use the bid or the ask price for the put? For the call? Using the appropriate (bid or ask) prices, is your proposed arbitrage trade still making money?
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