Lecture #4

Lecture #4 - Ec 136 Financial Economics Lecture 4 September...

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Ec 136, Financial Economics Lecture 4 September 8
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Outline for today 1. Law of one price. 2. Call and put options. 3. Put-call parity. www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings for this week: BKM Chapter 20.1, 20.2, 20.4
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1. Law of one price Redundant assets obtained by combining other assets. Asset 1 Asset 2 Asset 3 State 1 0 1 5 State 2 2 0 6 Price P 1 P 2 P 3 Is there a redundant asset in this economy? Can you determine the price P 3 of asset 3 using P 1 and P 2 ? Law of one price tmw should have the same price today.
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2. Calls and puts European call : right, but not the obligation, to E.g., suppose that IBM sells for S 0 = $50 today. You buy a call for price C 0 = $10 with exercise of X = $60 and expiration in six months. 1. If price of IBM goes to S T = $40, don’t exer- cise call: why pay $60 for a $40 stock? 2. If price of IBM goes to
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This note was uploaded on 09/02/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at Berkeley.

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Lecture #4 - Ec 136 Financial Economics Lecture 4 September...

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