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# wk5 - Solutions Tutorial Week 5 a Use the put-call parity...

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Solutions – Tutorial Week 5 Chapter 21 23. a. Use the put-call parity relationship for European options: Value of call + Present value of exercise price = Value of put + Share price Solve for the value of the put: Value of put = Value of call + PV(EX) – Share price Thus, to replicate the payoffs for the put, you would buy a 26- week call with an exercise price of \$100, invest the present value of the exercise price in a 26-week risk-free security, and sell the stock short. b. Using the put-call parity relationship, the European put will sell for: \$8 + (\$100/1.05) – \$90 = \$13.24 25. Straddle Butterfly 100 100 Payoff Share price Payoff to put Payoff to call 100 120 Payoff Payoff to buy call, EX = 100 Payoff to buy call, EX = 120 Share price Payoff to sell call, EX = 110,sell two

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The buyer of the straddle profits if the stock price moves substantially in either direction; hence, the straddle is a bet on high variability. The buyer of the butterfly profits if the stock price doesn’t move very much, and hence, this is a bet on low variability.
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wk5 - Solutions Tutorial Week 5 a Use the put-call parity...

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