# E2 880 c220 both the calls are american call options

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E2 = \$880 C2=\$20 Both the calls are American call options. What should be the price of call with E = \$860? C (E low)- C (E high) ≤ E high – E low Thus, C1- \$20 ≤ \$880- \$860 C1= \$40 9. A stock trades for \$120. A put on this stock has an exercise price of \$140 and is about to expire. The put trades for \$22. How would you respond to this set of prices? Explain According to Maximum value of a put option, at expiration, Put is Max [0, (E-S)]. So the put price should be \$20, but in this case it trades for \$22, the put is priced too high. Therefore, as a seller you can sell this put to gain \$22. In addition, if you want to buy this put, it will be not good a deal. Because it is overpriced put without investment value.

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10. Consider two puts on Merck stock with January maturity. Put 1 trades at a price of \$3.30 with an exercise price of \$35. Put 2 has an exercise price of \$60.00. What is the maximum price that put 2 can have? Assume American-style call options. P high – P low ≤ E high – E low P2- P1 ≤ E2- E1 Therefore, P2- \$3.30 ≤ \$60- \$35 P2= \$28.3
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• Summer '18
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