Stockprice44 putprice7 sellcallreceipt1

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Unformatted text preview: tion of Options Combination of Options ­ Offsetting Strategy If we further include initial cash outlays. Stock price = $44 Put price = $7 Sell call receipt = $1 Initial Cash outlay = $44 + $7 ­ $1 = $50 Your return = ($55 ­ $50)/$50 = 10% Hence, to maintain a riskfree return, the prices must be as such, otherwise arbitrage opportunities will exist. Put – Call Parity Put – Call Parity The value of a put and call with the same exercise price and expiry date are related to each other. Model C = S – [X / (1+RF)t] + P Where C = price of call S = stock price P = price of put X = exercise price RF = risk free rate Option Pricing Option Pricing 2­state Option Model Assume a market where there are only 2 possible stock prices at the end of the year. Current stock price is $40. A call option exists at X of $35, 1 year expiry. What is the value of the call option? Option Pricing Option Pricing Examine the payoffs at expiry: Stock price Buy Stock Buy Call (X = $35) $30 $30 0 $50 $50 $15 Range of Payoff $20 $15 To creat...
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This document was uploaded on 04/02/2014.

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