FIN 620 Session 8 Homework Assignment Answers

FIN 620 Session 8 Homework Assignment Answers - cash inflow...

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FIN 620 Session 8 Homework Assignment Answers: Session 8: Do problems 22-2, 22-8, and 22-20 22-2. a. The calls are in the money. The intrinsic value of the calls is $3. b. The puts are out of the money. The intrinsic value of the puts is $0. c. The Mar call and the Oct put are mispriced. The call is mispriced because it is selling for less than its intrinsic value. If the option expired today, the arbitrage strategy would be to buy the call for $2.80, exercise it and pay $80 for a share of stock, and sell the stock for $83. A riskless profit of $0.20 results. The October put is mispriced because it sells for less than the July put. To take advantage of this, sell the July put for $3.90 and buy the October put for $3.65, for a
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Unformatted text preview: cash inflow of $0.25. The exposure of the short position is completely covered by the long position in the October put, with a positive cash inflow today. 22-8. Using put-call parity and solving for the stock price we get: S + $3.15 = $85e (.048)(3/12) + $6.12 S = $86.96 22-20. If the standard deviation is infinite, d 1 goes to positive infinity so N(d 1 ) goes to 1, and d 2 goes to negative infinity so N(d 2 ) goes to 0. In this case, the call price is equal to the stock price, which is $35. Sources: http://www.mhhe.com/rwj http://tychousa.umuc.edu...
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