FIN4520-Chapter10

# FIN4520-Chapter10 - corresponding European option C ≥ c P...

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Properties of Stock Options Chapter 10 1

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Notation 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. 2
Effect of Variables on Option Pricing c p C P Variable S 0 K T σ r D + + + ? ? + + + + + + + + + + + 3

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American vs European Options An American option is worth at least as much as the

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Unformatted text preview: corresponding European option C ≥ c P ≥ p 4 Upper and Lower Bounds for Options with Dividends S ≥ c ≥ max(S - Ke-rT - D, 0) Ke-rT ≥ p ≥ max(Ke-rT - S + D, 0) S ≥ C ≥ max(S - Ke-rT- D, S - K, 0) K ≥ P ≥ max(Ke-rT- S + D , K- S, 0) 5 Calls: An Arbitrage Opportunity? Suppose that c = 3 S = 20 T = 1 r = 10% K = 18 D = 0 Is there an arbitrage opportunity? Upper bound OK (20 > 3). 3 ?≥ 20 – 18e-.10(1) = 3.71 6...
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## This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.

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FIN4520-Chapter10 - corresponding European option C ≥ c P...

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