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Unformatted text preview: An option on a portfolio is less valuable than a
portfolio of options on the individual stocks because, in the latter case, you can choose
which options to exercise. 20. Consider each company in turn, making use of the putcall parity relationship: Value of call + Present value of exercise price = Value of put + Share price Drongo Corp. Here, the lefthand side [52 + (50/1.05) = 99.62] is less than the righthand
side [20 + 80 = 100]. Therefore, there is a slight mispricing. To take advantage of this situation, one should buy the call, invest $47.62 at the riskfree rate, sell the put, and sell
the stock short. Ragwort, Inc. Here, the lefthand side [15 + (100/1.05) = 110.24) is greater than the right
hand side [10 + 80 = 90]. Therefore, there is a significant mispricing. To take advantage
of this situation, one should sell the call, borrow $95.24 at the riskfree rate, buy the put,
and buy the stock. Wombat Corp. For the threemonth option, the lefthand side [18 + (40/1.025) = 57.02]...
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This note was uploaded on 04/26/2013 for the course MATH 289Q taught by Professor Jamesbridgeman during the Fall '04 term at UConn.
- Fall '04