Put–Call Parity and Dividends [LO1] The put–call parity condition is altered when dividends are paid. The dividend-adjusted put–call parity formula is:
where d is again the continuously compounded dividend yield,
a. What effect do you think the dividend yield will have on the price of a put option? Explain.
b. From the previous question, what is the price of a put option with the same strike and time to expiration as the call option?
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- 3) The return on a stock, in a factor model, in a given period will be related to A) firm-specific events. B) macroeconomic events. C) the error term. D) both firm-specific events and macroeconomic events. E) neither firm-specific events nor macroeconomic events. 4) Assume the index model is valid, what inputs will be required to determine covariance between two assets? A) βk B) βL C) σM D) all of the options E) None of the options are correct.Choose the correct answer with justification.arrow_forwardProblem 4d: State whether the following statements are true or false. In each case, provide a brief explanation. d. In a binomial world, if a stock is more likely to go up in price than to go down, an increase in volatility would increase the price of a call option and reduce the price of a put option. Note that a static position is a position that is chosen initially and not rebalanced through time.arrow_forward1. Consider a family of European call options on a non - dividend - paying stock, with maturity T, each option being identical except for its strike price. The current value of the call with strike price K is denoted by C(K) . There is a risk - free asset with interest rate r >= 0 (b) If you observe that the prices of the two options C( K 1) and C( K 2) satisfy K2 K 1<C(K1)-C(K2), construct a zero - cost strategy that corresponds to an arbitrage opportunity, and explain why this strategy leads to arbitrage.arrow_forward
- Use the put-call parity relationship to demonstrate that an at-the-money call option on a nondividend-paying stock must cost more than an at-the-money put option. Show that the prices of the put and call will be equal if S0 = (1 + r)T..arrow_forwardS1: Call options' value go up if the market perceives the underlying asset to be undervalued. S2: Put options' increase in value is parallel to the increase of risk of an investment. A. Both statements are true B. Both statements are false C. Only statement 1 is true D. Only statement 2 is truearrow_forwardH5. What is the payoff to the trading strategy if the stock price at expiration is equal to $0 (i.e., the stock price is zero)? What is the payoff to the trading strategy if the stock price at expiration is equal to $50? What portfolio of calls (maturity T, any strike) and/or bonds (Zero Coupon Bond paying $1 at time T) will give you the desired payoff? Group of answer choices Sell $30 zero-coupon bonds, buy a call option with a strike price of $20, sell two call options with a strike of $40, and sell a call option with a strike price of $80 Buy $30 zero-coupon bonds, sell two call option with a strike price of $30, buy 2 call options with a strike of $40, and sell a call with a strike price of $80 It is not possible to construct this payoff with only calls and bonds Sell $50 zero-coupon bonds, buy two call with the strike price of $80, buy two calls with a strike price of $40, and sell a call with a strike of $20 Buy $30 zero-coupon bonds, sell a call option with a strike…arrow_forward
- which one is correct please confirm? Q19: "An increase in the exercise price, all other things held constant, will ______ the call option premium." increase decrease increase or decrease Not enough information is givenarrow_forward1.) According to Jacques’s recommendation, assuming that the market is in equilibrium, how much will the portfolio’s required return change? _______ 2.) Suppose, based on the earnings consensus of stock analysts, Jacques expects a return of 9.57% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued? _______ 3.) Suppose instead of replacing Atteric Inc.’s stock with Baque Co.’s stock, Jacques considers replacing Atteric Inc.’s stock with the equal dollar allocation to shares of Company X’s stock that has a higher beta than Atteric Inc.. If everything else remains constant, the portfolio’s risk would _______arrow_forwardD4) Real options make up a lower proportion of the total value of ”value stocks” than “growth stocks” True False 2.In general, an option is more valuable when it is not available to anyone. True Falsearrow_forward
- Required Return Beta Risk-Free Rate Market Return A 12.5% 0.90 8% ? B 9.0% 1.3 ? 8% C 10.0% ? 7.5% 10.5% a. What is the market return? b. What is the Risk-free rate? c. What is the beta?arrow_forwardLet X = strike price and S = share price. A put option is deep out-of-the-money if _____________ (choose the best answer from the list below to complete the sentence). X/S is between 1.01 and 1.05 X/S is between 1.06 and 1.15 X/S is between 0.95 and 0.99 X/S is between 0.85 and 0.94 X/S is equal to 1.00arrow_forwardBelow is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis. The solid line shows the profit/loss schedule for a: Question 8 options: put option in isolation (e.g. used for speculating that the pound will depreciate) None of the above covered call option (a call option is used as a hedge) covered put option (a put option is used as a hedge)arrow_forward