Beruflich Dokumente
Kultur Dokumente
Assumptions
No transaction costs
ask spread) No taxes No margin or short sale restrictions Trade can occur in stock and option markets instantaneously Dividends are received on the ex-dividend day, and ex-day stock price decline equals the dividend amount We restrict our discussion to stock options and index options. Some of these results do not apply
for is the current value of the underlying asset) What if C > S (i.e. C S > 0) ? In such cases there would be arbitrage opportunities: K= Actual Price St= Strike price _______Today Before Expiry At Expiration___ (on exercise) ST > K ST <K __________________(American)____________________ ___ Sell Call + C Deliver stock - (ST K) 0 Buy Stock - S0 & receive K + ST + ST ______________________________________________ __
0 ] European & American option on a non-dividend paying stock. The proposition implies that
If S0 < K e
rT,
then C must sell for more than zero. This is because that the worst that can happen is that it expires worthless, it cannot be negative. If S0 > K e rT, then C must sell for more than S0 - K e rT
What if C < [ S0 K e
rT,
rT,
_______Today Expiration___
At
ST > K
ST
stocks will always have some time value (except on the expiration day) An American call will never be exercised early
An investor receives a profit of S K (or intrinsic
value) on exercising the call option early if it is inthe-money However, on selling the call option, he will realize at least S0 K e rT , which is greater than intrinsic value Moreover, the call option provides the holder insurance which will vanish if he exercises the call option
sell for is the strike price) What if P > K (i.e. P K > 0) ? In such cases there would be arbitrage opportunities: _______Today Before Expiry At Expiration___ (on exercise) ST > K ST <K __________________(American)____________________ ___ Sell Put + P Receive stock 0 - (K - ST) Lend -K & deliver K + K + Int + K + Int ______________________________________________
&
- S0 ,0 ] European
P > = max [ K- S0 , 0 ] American option on a non-dividend paying stock. The proposition implies that
If S0 > K e
then P must sell for more than zero. This is because that the worst that can happen is that it expires worthless, it cannot be negative. If S0 < K e rT, then P must sell for less than S0 - K e rT since at expiry the payoff is going to be K e rT ST & thus P will trade lower than intrinsic value prior to expiry and move to K e rT ST at expiry If S0 < K, then American puts must sell for an amount greater than or equal to its ontrinsic value, K - S
What if P < [K e
rT-
rT,
S0 , 0 ]
_______Today Expiration___
At
ST > K
ST
intrinsic value and can never rise in value as expiration date nears
A European Put on a non-dividend-paying stock
Put-Call Parity
Consider the following two pportfolio:
Portfolio A: 1 European call option + cash equal to
early, both the portfolios must have equal values today: c + K e rT = p + S0 If the above equation does not hold then arbitrage