Complete the following sentence:"The put-call parity relationship between American options..."O I. is given by the following expression: St - K < Ct - Pt s St - K exp(-Ro (T-t))O II. cannot be derived because these options can be exercised before the expiration date.O II. yields a larger value of the call option than for the European option counterparts.O IV. None of the above. The stock price of Google is $32. The price of an American call option with strike price $32 and a six-month expiration date is $5 and the price of the corresponding Amertican put option(same maturity and expiration date) is $6. The risk-free interest rate is 5%. Are these prices compatible with the absence of arbitrage opportunities? Why?O I. No, because the put-call parity relationship suggests that ct - Pt = St - K exp(-Ro (T-t)) and this is not satisfied in this case.O II. Yes, because the price of the American put option is greater than the price of the American call option violating the inequality conditions defining the put-call parity relationship.O II. No, because the put-call parity relationship for American options suggests that St - K s Ct - Pt s St - K exp(-Ro (T-t)).O IV. It depends on whether the stock pays dividends or not.

put call parity formula: C+Xert=S0+P where, C = call price X = excerisce price r= interest rate t=…

Complete the following sentence: "The put-call parity relationship between American options..." O 1. is given by the following expression: St - K s Ct - Pt s St - K exp(-Ro (T-t)) O II. cannot be derived because these options can be exercised before the expiration date. O II. ields a larger value of the call option than for the European option counterparts. O IV. None of the above.

Complete the following sentence: "The put-call parity relationship between American options..." O 1. is given by the following expression: St - K s Ct - Pt s St - K exp(-Ro (T-t)) O II. cannot be derived because these options can be exercised before the expiration date. O II. ields a larger value of the call option than for the European option counterparts. O IV. None of the above.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter8: Financial Options And Applications In Corporate Finance

Section: Chapter Questions

Problem 5MC: In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1)...

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In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1) What assumptions underlie the OPM? (2) Write out the three equations that constitute the model. (3) According to the OPM, what is the value of a call option with the following characteristics? Stock price = 27.00 Strike price = 25.00 Time to expiration = 6 months = 0.5 years Risk-free rate = 6.0% Stock return standard deviation = 0.49
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