CHAPTER 21

Thereforeiftheexerciseprice

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Unformatted text preview: low exercise price.) c. The put when the interest rate is high. (You can invest the exercise price.) 13. a. When you exercise a call, you purchase the stock for the exercise price. Naturally, you want to maximize what you receive for this price, and so you would exercise on the with­dividend date in order to capture the dividend. b. When you exercise a put, your gain is the difference between the price of the stock and the amount you receive upon exercise, i.e., the exercise price. Therefore, in order to maximize your profit, you want to minimize the price of the stock and so you would exercise on the ex­dividend date. 14. [Note: the answer to this question is based on the assumption that the stock price is known.] We can value the call by using the put­call parity relationship: Value of put = value of call – share price + present value of exercise price Then we must purchase two items of information [value of European put and PV(Exercise price)] and, hence, will spend $20. If we use the Black­Scholes model, we must also purchase two items [standard deviation times square root of time to maturity and PV(exercise price)] and, hence, will spend $20. 15. Internet exerci...
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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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