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Unformatted text preview: EC3070 FINANCIAL DERIVATIVES PUT–CALL PARITY Upper Bounds Let p τ  be the current price at time t = 0 of a put option effective at time τ , and let c τ  be the current price of a corresponding call option. Also, let K τ  be the strike price of the options at the time τ of their expiry, and let S and S τ be the spot prices at time t = 0 and t = τ , respectively. The current spot price is an upper bound on the price of a call option: c τ  ≤ S . To understand this, observe that, by paying c τ  , one has acquired the oppor tunity either of owning the stock at a later date, if K τ  < S τ , or or foregoing ownership, if K τ  > S τ . If c τ  ≥ S , then one would have the possibility of owning the stock for certain both now and at time τ at the lesser cost of S . The value of a put option can never exceed the present value of the strike price: p τ  ≤ K τ  e − τ Either the put option becomes worthless, if S τ ≥ K τ  , or else it serves to secure a payment...
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This note was uploaded on 03/02/2012 for the course EC 3070 taught by Professor D.s.g.pollock during the Spring '12 term at Queen Mary, University of London.
 Spring '12
 D.S.G.Pollock

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