9. Given: C = $5.25, P = $2.75, S = $48, K = $39, T =...

9.

Given: C = $5.25, P = $2.75, S = $48, K = $39, T = 6 months, r = 3.25% p.a.

a. What would you do to exploit these quotes? (List the transactions.) What would be your riskless arbitrage profit?

b. How could you synthetically short-sell an asset using only options and borrowing or lending at the risk-free rate? Would you be better off short-selling the stock, or synthetically short-selling it using options?

Expert Solution

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE. THUMBS UP PLEASE.

jeff jeffy answered 1 year ago

Given: C = $4.00, P = $6.00, S = $42, K = $45, T = 3...

Given: C = $4.00, P = $6.00, S = $42, K = $45, T = 3 months, r = 8%. The option contracts are written on 100 units of the underlying asset. (Show work.) What would you do to exploit these quotes? (List all transactions you would make.) What would be your riskless profit? How could you synthetically sell a call option? What would be the cash flow from doing this? (i.e., What is the synthetic call premium?)

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09...

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09 pq/n= 0.09/48 0.001875 sqrt (pq/n)= sqrt (0.001875) 0.043301 sample prop / 90% =0.8125-0.9 -0.0875 z=-0.0875/0.043301 -2.02073 p value =NORMSDIST(H7) 0.02165 An air quality instrument logs 0 when standards are not met and 1 when standards are met. The log is saved to file DATA. First, compute the proportion meeting standards as the mean of air quality values. Second, at alpha=0.10 (sensitive, exploratory), test the...

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09...

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09 pq/n= 0.09/48 0.001875 sqrt (pq/n)= sqrt (0.001875) 0.043301 sample prop / 90% =0.8125-0.9 -0.0875 z=-0.0875/0.043301 -2.02073 p value =NORMSDIST(H7) 0.02165 An air quality instrument logs 0 when standards are not met and 1 when standards are met. The log is saved to file DATA. First, compute the proportion meeting standards as the mean of air quality values. Second, at alpha=0.10 (sensitive, exploratory), test the...

EXERCISE #4: Optional: Put-Call Parity: C – P = S – PV(K), PV(K) = K /...

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Question

9. Given: C = $5.25, P = $2.75, S = $48, K = $39, T =...

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Expert Solution

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Given: C = $4.00, P = $6.00, S = $42, K = $45, T = 3...

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09...

48 sample - 9 "0s" = 39 39 "1s" / 48 total sample= 0.8125 pq=0.9*(1-0.9) 0.09...

EXERCISE #4: Optional: Put-Call Parity: C – P = S – PV(K), PV(K) = K /...

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