LEC8 - ACCG329 Lecture 8 Properties of Options on Equity 2...

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1 ACCG329 Lecture 8: Properties of Options on Equity 2009, Semester 1 Egon Kalotay Notation based on Hull c : European call option price p :European put option price S 0 : Stock price today K : Strike price T : Life of option σ : Volatility of stock price C : American Call option price P : American Put option price S T : Stock price at option maturity D : Present value of dividends during option’s life r : Risk-free rate for maturity T with cont comp
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2 Effect of Variables on Option Pricing (Table 9.1, page 202) c p C P Variable S 0 K T σ r D + + + ? ? + + + + + + + + + + + Determinants of Option Value: Some Intuition • American vs European • Time to Maturity • Volatility • Risk Free Rate
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3 Option Price Boundaries: Upper Bound • European or American Call: • American Put: • European Put: Calls: An Arbitrage Opportunity? • Suppose that c = 3 S 0 = 20 T = 1 r = 10% K = 18 D = 0 • Is there an arbitrage opportunity?
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4 Lower Bound for European Call Option
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LEC8 - ACCG329 Lecture 8 Properties of Options on Equity 2...

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