Errata - The Chapter 20 Connect assignment has a number of...

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The Chapter 20 Connect assignment has a number of egregious errors and I apologize for that. Please find below answers to 3 problems from the back of Chapter 20. Note that there is a typo in question 11, the call and put exercise prices should be reversed (call option strike should be $45, put option strike should be $35). 8. a. From put-call parity: 0 .25 50 4 50 $5.18 (1 ) 1.10 T f X CPS r   b. Sell a straddle, i.e., sell a call and a put to realize premium income of: $5.18 + $4 = $9.18 If the stock ends up at $50, both of the options will be worthless and your profit will be $9.18. This is your maximum possible profit since, at any other stock price, you will have to pay off on either the call or the put. The stock price can move by $9.18 in either direction before your profits become negative. c. Buy the call, sell (write) the put, lend: $50/(1.10) 1/4 The payoff is as follows: Position Immediate CF CF in 3 months S T X S T > X Call (long) C = 5.18 0 S T – 50 Put (short) –P = 4.00 – (50 – S T ) 0 Lending position 82 . 48 10 . 1
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This note was uploaded on 02/02/2012 for the course ECON 442 taught by Professor Grahamlemke during the Spring '11 term at Binghamton University.

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Errata - The Chapter 20 Connect assignment has a number of...

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