Question
It is November 12 th , 2020 and you are looking at the screen reported below. On a different screen (not shown) you see that
It is November 12th, 2020 and you are looking at the screen reported below. On a different screen (not shown) you see that the S&P500 dividend yield is 1.80% (per annum, continuously compounded) and that the USD Libor is at 0.1403% (also per annum and continuously compounded)
Consider the 3575 December 4th. Call and Put. from the screenshot below. Your friend Howard Wolowitz, a well-known guru in the options market, tells you that over the life of the two options, the S&P500 will pay a cumulative dividend with a present value (as of today, November 12th.) of $9.0454
Please note: IV in the table represent the annualized implied volatility of the option.
In part a, b and c, please use the discrete dividend amount provided. In part e, please use the dividend yield provided.
For all answers, please show your work
- What are the respective time values and intrinsic values of the two options you are considering?
- Are they both trading within their arbitrage bounds?
Round to 2 decimal digits at each step.
- Does put-call parity hold for those two options?
- Ignoring transactions costs, do you see arbitrage opportunities involving those two options?
- Price the 3575 December 4th. call according to the BSM model (use calendar days).
- How does the BSM price compare to the market price of the call?
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