Question Solved1 Answer Question 4 (13 points) a) The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Hint: Don't forget to check the put-call parity. (8 points) Call Price 15.00 10.00 8.00 8.00 40.00 Stock Time to Exercise| Exercise Stock Put (months) Question 4 (13 points) a) The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Hint: Don't forget to check the put-call parity. (8 points) Call Price 15.00 10.00 8.00 8.00 40.00 Stock Time to Exercise| Exercise Stock Put (months) Furbish Lousewort Quercus Alba Fagus Sylvatica Fagus Sylvatica Fagus Sylvatica Price 100 50 50 50 10 Price 90 60 50 50 50 10.00 2.00 4.60 5.60 0.0 12 b) You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, yoiu are short two otherwise identical calls, both with an exercise price of S50. Plot the payoff of this combination as a function of the stock price on the exercise date. What are your expectations about the stock's price movement? (5 points)
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Transcribed Image Text: Question 4 (13 points) a) The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Hint: Don't forget to check the put-call parity. (8 points) Call Price 15.00 10.00 8.00 8.00 40.00 Stock Time to Exercise| Exercise Stock Put (months) Furbish Lousewort Quercus Alba Fagus Sylvatica Fagus Sylvatica Fagus Sylvatica Price 100 50 50 50 10 Price 90 60 50 50 50 10.00 2.00 4.60 5.60 0.0 12 b) You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, yoiu are short two otherwise identical calls, both with an exercise price of S50. Plot the payoff of this combination as a function of the stock price on the exercise date. What are your expectations about the stock's price movement? (5 points)
More Transcribed Image Text: Question 4 (13 points) a) The following table lists some prices of options on common stocks. The interest rate is 10 percent a year. Can you spot any mispricing? What could you do to take advantage of it? Hint: Don't forget to check the put-call parity. (8 points) Call Price 15.00 10.00 8.00 8.00 40.00 Stock Time to Exercise| Exercise Stock Put (months) Furbish Lousewort Quercus Alba Fagus Sylvatica Fagus Sylvatica Fagus Sylvatica Price 100 50 50 50 10 Price 90 60 50 50 50 10.00 2.00 4.60 5.60 0.0 12 b) You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, yoiu are short two otherwise identical calls, both with an exercise price of S50. Plot the payoff of this combination as a function of the stock price on the exercise date. What are your expectations about the stock's price movement? (5 points)
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ANSWER:Put call parity states that: S+P=C+Xe^(-rt)If LHS is not equal to RHS, there is mispricing and we canexploit the mispricing by selling the higher side and buying thelower side1. LHS=90+10=100RHS=15+100*e^(-10%*6/12)=110.1229This is mispricing..Hence, buy Stock and Put and sell call andlend at risk free2LHS=60+2=62RHS=10+50*e^(-10%*6/12)=57.56This is mispricing..Hence, sell Stock and sell Put and buy calland ... See the full answer