Lecture#5 - Ec 136 Financial Economics Lecture 5 September 10 Outline for today 1 Put-call parity 2 Complete markets

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Ec 136, Financial Economics Lecture 5 September 10
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Outline for today 1. Put-call parity. 2. Complete markets. www.econ.berkeley.edu/~szeidl/ec136/ec136index.htm Readings for this week: BKM Chapter 20.1, 20.2, 20.4 Problem set 2 : due September 17, Thursday, in class.
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1. Put-call parity European call : right, but not obligation, to buy European put: right, but not obligation, to sell Denote S 0 =stock price today, X =exercise price, T =future date, C 0 =call price, P 0 =put price. Let 1 + R f be riskfree rate. Claim: call price + discounted exercise price = = stock price + put price. Formally C 0 + X 1 + R f = S 0 + P 0 :
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Consider two investment strategies (portfolios): 1. Buy a call and invest X= (1 + R f ) in bank account, 2. Buy the stock and a put option. portfolio 1 portfolio 2 X S T price today C 0 + X 1+ R f S 0 + P 0 Equivalently portfolio 1
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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 University of California, Berkeley.

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Lecture#5 - Ec 136 Financial Economics Lecture 5 September 10 Outline for today 1 Put-call parity 2 Complete markets

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