Chapter5 - Chapter Five Option Pricing Answers to Problems...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter Five Option Pricing Answers to Problems and Questions 1. Arbitrage is the existence of a riskless profit, especially when you do not have to commit funds to earn the profit. 2. Market prices move continually, and frequently move slightly away from an equilibrium price. It is the actions of arbitrageurs that move them back to their proper level. 3. Given the €/$ and €/AuD exchange rates, an Australian dollar should cost $1.15/$1.63 = $0.7055. If the Australian dollar sells for less than this, the appropriate arbitrage activity would be to buy the Australian dollar and exchange it for another currency. 4. Differences in trading fees and taxes may make a situation profitable for one person, but not for another. For instance, a trade in the tax-exempt account of an endowment fund may be much less attractive from the perspective of a taxable investor. 5. The law of one price states that equivalent assets should sell for the same price. You should be able to buy just as much with a twenty dollar bill as with two tens. 6. You can create a synthetic put by selling stock short and adding a long call position. The profit and loss diagram is similar to that of a put option. More formally, from put/call parity, P = C + K/(1+R) t – S. This means a package comprised of a long call, short stock, and the investment of the present value of the striking price is equivalent to a long put. 7.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/31/2011 for the course ACCT 331 taught by Professor N/a during the Spring '10 term at Mountain State.

Page1 / 5

Chapter5 - Chapter Five Option Pricing Answers to Problems...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online