Lecture6_BSmodel

# Make put money when stock price s drops so its like

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Unformatted text preview: borrowing from banks) - Put option: the buyer pays little premium to make Put money when stock price (S) drops; so, it’s like short-selling the stock and using the cash to finance a long position on bond (save in banks)15-5 finance Put-Call Parity – no dividend • We know that the initial investment (i.e., cash flow) of (a) We buying one call at strike price K and selling one put at strike price K will equal the initial investment (i.e., cash flow) of (b) buying a share of the stock (no dividend) and short-selling a risk-free bond with face value of K at T c − p = S − K e − rT since c = S N (d1 ) − K e − rT N (d 2 ) p = c − S + K e − rT = S N (d1 ) − K e − rT N (d 2 ) − S + K e − rT = (1 − N (d 2 )) K e − rT − S (1 − N (d1 )) = K e − rT N (− d 2 ) − SN (− d1 ) 15-6 Put-Call Parity – no dividends (1) Portfolio A: Portfolio 1. Buy 1 unit (1 share) of call option at strike price K (the current price is c) 2. Sell 1 unit (1 share) of put option at strike price K (the current price is p) 3. Port...
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## This document was uploaded on 03/03/2014.

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