11/17/2010
1
Financial Economics
Lecture 32
Economics 3330
Cornell University
November 17, 2010
Agenda
•
LC: Covered Call, Pre
‐
expiration values
–
Begin Chapter 21
•
TC: Pre
‐
expiration values, Binomial Options
•
NC: Black
‐
Scholes
•
Lectures 34
‐
36 on Performance Evaluation and
Hedge Funds drawn from Chapters 24 and 26
•
Final lecture will be a review
•
PS 10 due 12/2 to be posted soon
Pre
‐
Expiration Call Price Bounds
•
Observation: Price C of
call should always be
less than that of stock
itself
•
Observation: Based on
constructed portfolio
that was (weakly) worse
than option
C
>
S
0
‐
PV(X)
‐
PV(D)
•
Need more structure to
actually know
C
Pre
‐
Expiration Call Price
(Illustrative)
•
Less likely that the asset
price will be below
exercise price at
expiration as current
price increases
•
Thus,
C
moving closer
to
S
0
‐
PV(X)
‐
PV(D)
on
graph as
S
0
increases
•
How does slope
change?
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- Fall '05
- CHIRIK,P
- Chemistry, Harshad number, Cornell University
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