CHAPTER 20

# Bagainwerearrangetheputcallparityrelationship

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Unformatted text preview: th the same set of payoffs is: Buy a put with an exercise price of \$150 Buy a share of stock Borrow the present value of \$150 Sell a call with an exercise price of \$50 11. Statement (b) is correct. The appropriate diagrams are in Figure 20.5 in the text. The second row of diagrams in Figure 20.5 shows the payoffs for the strategy: Buy a share of stock and buy a put. The third row of Figure 20.5 shows the payoffs for the strategy: Buy a call and lend an amount equal to the exercise price. 12. Answers here will vary depending on the options chosen, but the formulas will work very well; discrepancies should be on the order of 5 percent or so, at most. 13. We make use of the put­call parity relationship: Value of call + Present value of exercise price = Value of put + Share price a. Rearranging the put­call parity relationship to show a short sale of a share of stock, we have: (­ Share price) = Value of put ­ Value of call ­ PV(EX) This implies that, in order to replicate a short sale of a share of stock, you would purchase a put, sell a call, and borrow the prese...
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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.

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