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Question 2 : Option Pricing Bounds ( 2 / 1 0 ) Suppose a call option and a put option have maturity T and strike
Question : Option Pricing Bounds Suppose a call option and a put option have maturity and strike price The current market price of the underlying stock no dividends is and the continuously compounding interest rate is constant at Then we have the payoffs of the two options satisfying Call Option Payoff at :max Put Option Payoff at :max i A fact states that if two quantities at always satisfy then their present value must satisfy Can you use this act to derive the modelfree bounds of the prices of call option and put option Hint: present value of a stock without dividends is its current market price, and present value of a riskfree amount is the amount discounted by riskfree rate. ii Suppose the price of the call option is larger than how can you arbitrage? Suppose the price of the put option is larger than how can you arbitrage? iii Suppose the price of the call option is smaller than how can you arbitrage? Suppose the price of the put option is smaller than how can you arbitrage? iv What is the equation for putcall parity? Suppose the price of the put option is larger than what the putcall parity implies, how can you arbitrage?
Question : Option Pricing Bounds Suppose a call option and a put option
have maturity and strike price The current market price of the underlying stock no
dividends is and the continuously compounding interest rate is constant at Then we
have the payoffs of the two options satisfying
Call Option Payoff at :max
Put Option Payoff at :max
i A fact states that if two quantities at always satisfy then their
present value must satisfy Can you use this act to derive the
modelfree bounds of the prices of call option and put option Hint: present
value of a stock without dividends is its current market price, and present value of a
riskfree amount is the amount discounted by riskfree rate.
ii Suppose the price of the call option is larger than how can you arbitrage?
Suppose the price of the put option is larger than how can you arbitrage?
iii Suppose the price of the call option is smaller than how can you
arbitrage? Suppose the price of the put option is smaller than how
can you arbitrage?
iv What is the equation for putcall parity? Suppose the price of the put option is larger
than what the putcall parity implies, how can you arbitrage?
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