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 8%. 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. It depends on whether the stock pays dividends or not. 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 IV. No, because the put-call parity relationship for American options suggests that St - K s ct - Pt < St - K exp(-Ro (T-t)).

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 8%. 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. It depends on whether the stock pays dividends or not. 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 IV. No, because the put-call parity relationship for American options suggests that St - K s ct - Pt < St - K exp(-Ro (T-t)).

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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