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Properties of Stock
Options
Chapter 10
1
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View Full Document Notation
z
c
:
European call
option price
z
p
: European put
option price
z
S
0
: Stock price today
z
K
: Strike price
z
T
: Life of option
z
σ
:
Volatility of stock
price
z
C
: American Call option
price
z
P
: American Put option
price
z
S
T
:Stock price at option
maturity
z
D
: Present value of
dividends during option’s
life
z
r
: Riskfree rate for
maturity
T
with cont. comp.
2
Effect of Variables on Option
Pricing
(Table 10.1, page 228)
cpCP
Variable
S
0
K
T
σ
r
D
++
–
+
??
++++
+
–
+
–
–
––
+
–
+
–
+
3
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View Full Document American vs European Options
An American option is worth
at least as much as the
corresponding European
option
C
≥
c
P
≥
p
4
Calls: An Arbitrage Opportunity?
z
Suppose that
c
= 3
S
0
= 20
T
= 1
r
= 10%
K
= 18
D
= 0
z
Is there an arbitrage opportunity?
5
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View Full Document Lower Bound for European Call
Option Prices; No Dividends (
Equation
10.4, page 233)
c
≥
S
0
–Ke
rT
6
Puts: An Arbitrage Opportunity?
z
Suppose that
p
= 1
S
0
= 37
T
= 0.5
r
=5%
K
= 40
D
= 0
z
Is there an arbitrage
opportunity?
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This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.
 Spring '11
 Liu
 Options, Volatility

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