Question
Call and put options listed in exchanges are to expire in 52 days with current underlying trading at 70 with expected annual required rate of
Call and put options listed in exchanges are to expire in 52 days with current underlying trading at 70 with expected annual required rate of returns of 20%, and annual risk-free annual rates from Treasury bills at 4.5 percent. Assume that the underlying asset is not paying cash dividends during the life of the options. (i) Find and explain the lower bounds of European calls and puts with exercises of 60 and 80 respectively. (ii) Discuss and explain the impact of an increase in expected required rate of returns of the underlying asset on the lower bounds of European calls and puts of part i
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