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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