24Lecture24

J hawkins 10 0 10 20 30 40 50 60 70 80 underlying

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Call 10 Synthetic Portfolio OPTION PRICE (arbitrary) STRIKE 0 1 PREMIUM -20 -30 Short European Call 3 -10 Long the underlying. 2 BREAKEVEN Looks like risky debt. -40 OUT OF THE MONEY -50 0 10 20 30 40 S − C = Ke −rt − P IN THE MONEY 50 60 70 80 90 100 100 100 POSITION PRICE (arbitrary) UNDERLYING ASSET LEVEL (arbitrary) UNDERLYING ASSET LEVEL (arbitrary) 75 50 25 0 0 25 50 75 100 UNDERLYING ASSET LEVEL (arbitrary) Derivatives I: R. J. Hawkins 75 STRIKE 50 25 0 0 25 50 75 UNDERLYING ASSET LEVEL (arbitrary) Econ 136: Financial Economics 17/ 18 100 The Covered Call & Risky Debt Recall our example of the Unit Trust VALUE OF UNIT TRUST (USD) 300 Asset Liability (Debt), t = 1 Liability (Debt), t = 0 Equity, t = 1 Equity, t = 0 250 200 150 100 50 0 0 50 100 150 200 250 VALUE OF SPY INVESTMENT (USD) Derivatives I: R. J. Hawkins Econ 136: Financial Economics 18/ 18 300 Put-Call Parity Consider the following portfolios: 1 Buy a call and invest Ke −rt in a bank account. 2 Buy the stock and a put option....
View Full Document

Ask a homework question - tutors are online