Fm3_problems16 - Exercise 1 Arbitrage Today Buy April Option-6 Sell Feb Option 6.375 Net 0.375 The strategy If the February option is exercised

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Exercise 1 Page 1 Arbitrage: Buy April Option Sell Feb. Option Net Today -6 6.375 0.375 The strategy: If the February option is exercised, exercise the April option to cover; the future cash flow will thus at worst be zero. The initial cash flow, as shown above, will be positive. The most likely explanation for the newspaper quotes is that the prices quoted are not from simultaneous trades. In order for a true arbitrage to be occur, it must be possible to simultaneously trade in both options at once.
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S 60 X 45 Call price 2 Arbitrage: Buy the option, exercise immediately Cost -2 Exercise profit 15 #MACRO? Total 13 #MACRO? Minimum option price (following Proposition 1): Interest rate 10% Minimum call price 19.091 #MACRO?
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S 80 X 80 Interest rate 8% T 1 Dividend at t=0.5 3 Minimum option price (following Prop Minimum call price 3.039 3.268
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position 7): #MACRO? #MACRO?
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Exercise 4 Page 5 Put X=50 P=6 Call X=60 P=10 4.a. 1 put bought and 1 call bought Summary of strategies Call Put Profit 1 Put 2 Puts 3 Puts 40 -10 4 -6 40 -6 -2 2 42 -10 2 -8 42 -8 -6 -4 44 -10 0 -10 44 -10 -10 -10 46 -10 -2 -12 46 -12 -14 -16 48 -10 -4 -14 48 -14 -18 -22 50 -10 -6 -16 50 -16 -22 -28 52 -10 -6 -16 52 -16 -22 -28 54 -10 -6 -16 54 -16 -22 -28 56 -10 -6 -16 56 -16 -22 -28 58 -10 -6 -16 58 -16 -22 -28 60 -10 -6 -16 60 -16 -22 -28 62 -8 -6 -14 62 -14 -20 -26 64 -6 -6 -12 64 -12 -18 -24 66 -4 -6 -10 66 -10 -16 -22 68 -2 -6 -8 68 -8 -14 -20 70 0 -6 -6 70 -6 -12 -18 72 2 -6 -4 72 -4 -10 -16 74 4 -6 -2 74 -2 -8 -14 76 6 -6 0 76 0 -6 -12 78 8 -6 2 78 2 -4 -10 80 10 -6 4 80 4 -2 -8 82 12 -6 6 82 6 0 -6 84 14 -6 8 84 8 2 -4 86 16 -6 10 86 10 4 -2 88 18 -6 12 88 12 6 0 90 20 -6 14 90 14 8 2 4.b. 2 puts bought and 1 call bought
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This note was uploaded on 01/23/2011 for the course FGB 780 taught by Professor Edwardchang during the Spring '09 term at Missouri State University-Springfield.

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Fm3_problems16 - Exercise 1 Arbitrage Today Buy April Option-6 Sell Feb Option 6.375 Net 0.375 The strategy If the February option is exercised

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