Question
1. Suppose that you used the binomial option pricing model to value 9 month XYZ call options and found the intrinsic value of the option
1. Suppose that you used the binomial option pricing model to value 9 month XYZ call options and found the intrinsic value of the option to be $4.25. However, you notice these options are actually trading at $4.65. What should you do to earn an arbitrage profit according to the binomial option pricing model? (Hint: the binomial model is derived from put-call parity)
a. Buy the calls and short XYZ shares
b. Short XYZ calls and buy XYZ shares.
c. Short the calls and short XYZ stock.
d. Buy XYZ calls and buy XYZ stock.
2. ABC call options expire in a year. All else being equal, using a 12 period binomial option model must result in a higher value for ABC calls than using a 6 period binomial option model.
a. true
b. false
I've bolded my answers and I just want to check my work.
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