KIC000059 - Equity, Options, & T-bills Borrowing and...

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Equity, Options, T-bills We can express the payoffs as a percentage return on the original investment: Motorola Stock Price $30 $50 $80 All Stock -40% 0% 60% All Options -100% -33% 167% Options+Bills -28.6% -9% 51% Put-Call Parity Relationship Suppose you buy a European cal! and short a European put with the same strike price and maturity. Then your payoffs at expiration would be either 5,-sX 5,->X Payoff for Call Owned 0 ST-X Payofl' Cor Put Written -(X-S) 0 Total Payoff 5,-- X 5,-- X Arbitrage Put-Call Parity Since the ending payoff on a combination of long call and short put is equivalent to that of leveraged equity, the cost of entering into either position today must be equal: If the prices are not equal, possible. will be Borrowing and Lending Suppose a zero-coupon bond has a face value $X The present value of the bond is then Xe-" If I buy (long) the bond, my holdings are + Xe-r" - Since I have given someone cash in exchange for their promise to repay me X at time T. I am
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This note was uploaded on 09/07/2011 for the course FINANCE 320 taught by Professor Sapp during the Fall '10 term at Iowa State.

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KIC000059 - Equity, Options, & T-bills Borrowing and...

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