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Question 1 A call option has an exercise price of $ 1 0 . 0 0 and an expiry date of six months. The underlying
Question
A call option has an exercise price of $ and an expiry date of six months. The underlying stock is currently trading for $
a What is the minimum price an investor would pay for this option? Could an investor
profit if the call option was actually trading at $
b What is the maximum price an investor would pay for this option? If the option was
trading for $ how could an investor earn a riskfree profit?
This is a more analytical question than a quantitative one.
Question
A call option has a striking price of $ and an expiry date of six months. The underlying stock is
currently trading at $ and has historically exhibited a standard deviation of percent. The
standard deviation is not expected to change. The interest rate is percent. Using the BlackScholes equation, estimate the value of the call option described above. What are some of the limitations of using the BlackScholes equation?
Question
Suppose you have just purchased a share of stock in WYZ Corp for $ The stock is not expected to pay a dividend during the time you plan to hold it You have forecasted that the stock will be worth in one year either $ or $ Suppose further that you can sell a call option on WYZ stock with an exercise price of $ It is a Europeanstyle contract that expires in exactly one year. What the option should sell for today if the oneyear Tbill yield is
Question
Suppose that WYZ stock is currently valued at $ and that call and put options on WYZ stock with an exercise price of $ sell for $ and $ respectively. Both options can only be exercised in months. You can also buy a month Tbill with a $ face value with an annualized ratereturn of Does PutCall parity hold? If not, what is the arbitrage trade you should make and what is the arbitrage profit? Please answer all this with the necessary math work.Show working
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