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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
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.
- Spring '14