Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 6 (16 marks) a) It has been observed that the put-call parity relation is often violated in practice that is, Put price > Synthetic

image text in transcribed

Question 6 (16 marks) a) It has been observed that the put-call parity relation is often violated in practice that is, Put price > Synthetic put price = Call price + Present value of strike price - Underlying stock price + Present value of dividends. In other words, if one buys the synthetic put by buying call, buying a risk-less bond that pays the strike price at the maturity, and short-selling the underlying stock and sells the put with the same strike price as the call option, she can make an arbitrage profit. Name TWO market frictions that would limit arbitrageurs from profiting from put-call parity violations and briefly explain. (4 marks) Question 6 (16 marks) a) It has been observed that the put-call parity relation is often violated in practice that is, Put price > Synthetic put price = Call price + Present value of strike price - Underlying stock price + Present value of dividends. In other words, if one buys the synthetic put by buying call, buying a risk-less bond that pays the strike price at the maturity, and short-selling the underlying stock and sells the put with the same strike price as the call option, she can make an arbitrage profit. Name TWO market frictions that would limit arbitrageurs from profiting from put-call parity violations and briefly explain. (4 marks)

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

Step: 3

blur-text-image

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

Auditing Outsourced Functions Risk Management In An Outsourced World

Authors: Mark Salamasick

1st Edition

0894137255, 9780894137259

More Books

Students also viewed these Accounting questions

Question

3. What should a contract of employment contain?

Answered: 1 week ago

Question

1. What does the term employment relationship mean?

Answered: 1 week ago