Unformatted text preview: t = 0 be S = 100. Suppose that, after one year, when t = 1, the price will be either S u 1 = 200 or S d 1 = 50. A call option to buy the share at time t = 1 at a price of K 1  = 150 can be purchased at time t = 0 for c 1  . Show that, unless c 1  = { 100 − 50(1 + r − 1 ) } / 3, there will always exist a combination of x shares and y options that will yield a proFt. (Here, x is negative, if you are selling shares at time t = 0, and postive, if your are purchasing them, and likewise for the number of options purchased or sold.) 1...
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 Spring '12
 D.S.G.Pollock
 Strike price

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