Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Consider the October 2015 IBM call and put options in the table Ignoring the negligible interest you might earn on T-Bills over the remaining few

Consider the October 2015 IBM call and put options in the table Ignoring the negligible interest you might earn on T-Bills over the remaining few days' life of the options, show that there is no arbitrage opportunity using put-call parity for the options with a $140 strike price.

Specifically:

a. What is your profit/loss if you buy a call and T-Bills, and sell IBM stock and a put option? (Select the best answer below)

A. Sell call and T-Bills, buy stock and put = -$9.50 + $140.00-$148.72+$0.35=-$17.87

B. Sell call and T-Bills, buy stock and put = +$9.15 + $140.00-$149.04-$0.36=-$0.25

C. Sell call and T-Bills, buy stock and put = +$9.15 - $140.00+149.04-$0.36=$17.83

D. Sell call and T-Bills, buy stock and put = -$9.50 - $140.00+$148.72+$0.35=-$0.43

b. What is your profit/loss if you buy IBM stock and a put option, and sell a call and T-Bills? (Select the best answer below)

A. Sell call and T-Bills, buy stock and put = +$9.15 + $140.00-$149.04-$0.36=-$0.25

B. Sell call and T-Bills, buy stock and put = -$9.50 + $140.00-$148.72+$0.35=-$17.87

C. Sell call and T-Bills, buy stock and put = -$9.50 - $140.00+$148.72+$0.35=-$0.43

D. Sell call and T-Bills, buy stock and put = +$9.15 - $140.00+$149.09-$0.36=$17.83

c. Explain why your answers to (a) and (b) are not both zero. (select the best choice)

A. Both negative due to transactions costs: call spread ($0.32)+put spread ($0.01)+stock spread ($0.35)=$0.68 in total loss in (a) and (b).

B. Both negative due to transactions costs: call spread ($0.35)+put spread ($0.32)+stock spread ($0.01)=$0.68 in total loss in (a) and (b).

C. Both negative due to transactions costs: call spread ($0.01)+put spread ($0.35)+stock spread ($0.32)=$0.68 in total loss in (a) and (b).

D. Both negative due to transactions costs: call spread ( $ 0.35) + put spread ($ 0.01) + stock spread ($ 0.32) = $0.68 in total loss in

(a) and (b).

d. Do the same calculation for the October options with a strike price of $150. What do you find? How can you explain this?

Is the following statement true or false?

"In this case, there appears to be a small profit if we buy the stock and the put, and sell the call and a risk-free bond with a face value of $150: negative $ 2.47 minus $ 149.04 plus $ 1.53 plus $ 150 equals $ 0.02$2.47$149.04+$1.53+$150=$0.02. Of course, most traders could not actually borrow at a 0% interest rate, and so would receive less than $150 for the bond, eliminating this profit. And even if this were possible, after executing a few trades prices would quickly move to eliminate this arbitrage."

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Monetary Policy Strategy

Authors: Frederic S. Mishkin

1st Edition

0262513374, 978-0262513371

More Books

Students also viewed these Finance questions

Question

What is meant by planning or define planning?

Answered: 1 week ago

Question

Define span of management or define span of control ?

Answered: 1 week ago

Question

What is meant by formal organisation ?

Answered: 1 week ago

Question

What is meant by staff authority ?

Answered: 1 week ago