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Lecture 8 Supplementary Part 2


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Unformatted text preview: ll‐Parity? If so, can you explain why? If not, why not? Answer: Yes. We can reason this out the same way we did when we derived the Put‐Call‐Parity for ordinary European Op'ons. In the case of the Compound Op'ons, suppose we buy a CallOnCall and sell a PutOnCall, both at the same strike X, same underlying op'on and same 'me to maturity. What do we get when the compound op'on expires? We get the underlying op'on at price X (If the price is high, the CallOnCall is exercised. If the price is low, the PutOnCall is exercised.). Thus, the difference between the premiums of the CallOnCall and the PutOnCall, plus the present value of X, must equal the premium to acquire the underlying op'on outright! 3/31/12 3 2. Exo'c Op'ons Supplementary Slide 4 A Taxonomy of Exo'c Op'ons – Com...
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