Let C be the price of a call option that enables its holder to buy one share of a stock at an exercise price K at time t; also, let P be the price of a European put option that enables its holder to sale one share or the stock for the amount K at time t. Let S be the price of the stock at time 0. Then, assuming that interest is continuously discounted at a nominal rate r, either S+P-C=Ke-rt or there is an arbitrage opportunity. Question: How do I verify that the strategy of selling one share of stock, selling one put option, and buying one call option always results in a positive win if S+P-C>Ke-rt ?
Let C be the price of a call option that enables its holder to buy one share of a stock at an exercise price K at time t; also, let P be the price of a European put option that enables its holder to sale one share or the stock for the amount K at time t. Let S be the price of the stock at time 0. Then, assuming that interest is continuously discounted at a nominal rate r, either S+P-C=Ke-rt or there is an arbitrage opportunity. Question: How do I verify that the strategy of selling one share of stock, selling one put option, and buying one call option always results in a positive win if S+P-C>Ke-rt ?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Let C be the price of a call option that enables its holder to buy one share of a stock at an exercise price K at time t; also, let P be the price of a European put option that enables its holder to sale one share or the stock for the amount K at time t. Let S be the price of the stock at time 0. Then, assuming that interest is continuously discounted at a nominal rate r, either
S+P-C=Ke-rt or there is an arbitrage opportunity.
Question: How do I verify that the strategy of selling one share of stock, selling one put option, and buying one call option always results in a positive win if S+P-C>Ke-rt ?
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