case03 - Introduction to derivatives, Fall 2011 BUSI 588,...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Introduction to derivatives, Fall 2011 BUSI 588, Case 3 Rocinante: put call parity and arbitrage Please prepare for class discussion on Wednesday, 8/31. Rocinante is considering trading on options on gold, the most liquid asset in medieval Europe (the time and place where this case is set). Gold is currently trading at $101.45, and current prices options on gold maturing in exactly one year and with strike price of $110 are given below. call price put price Aug 110.00 10.25 8.15 The risk-free rate in Castilla, the country of residence of Rocinante, is currently 10% (in annual terms). The puts and the calls are all on one unit of gold, namely one kilogram (2.205 pounds). 1. (*) Rocinante is wondering whether to put his savings, hard-earned through multiple danger- ous adventures in the Iberian peninsula, in one of the following two trading strategies: (a) Buy a call (with strike of $110) and invest $100 in the risk-free asset (for each call bought). (b) Buy gold and a put (with strike of $110) in equal amounts (i.e. one kilogram of gold for
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/25/2011 for the course BUSI 588 taught by Professor Staff during the Fall '10 term at UNC.

Ask a homework question - tutors are online