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 c - 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 - Ks Ct - Pt < St - K exp(-RO (T-t)). O IV. It depends on whether the stock pays dividends or not.
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 c - 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 - Ks Ct - Pt < St - K exp(-RO (T-t)). O IV. It depends on whether the stock pays dividends or not.
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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