Exam 9: Parity and Other Option Relationships

A European call option with a strike price of $30.00 expires in 3 months. In put-call parity, what impact does the interest on the strike price have given 6.0% interest rates?

A company is forecasted to pay dividends of $0.90, $1.20, and $1.45 in 3, 6, and 9 months, respectively. Given interest rates of 5.5%, how much dollar impact will dividends have on option prices? (Assume a 9-month option.)

The spot exchange rate in dollars per euro is $1.31. Dollar denominated interest rates are 4.0% and euro denominated interest rates are 3.0%. What is the difference in call and put option prices given a 2-year option and a $1.34 strike price?

Jafee Corp. common stock is priced at $36.50 per share. The company just paid its $0.50 quarterly dividend. Interest rates are 6.0%. A $35.00 strike European call, maturing in 6 months, sells for $3.20. What is the price of a 6-month, $35.00 strike put option?

Consider the case of an exchange option in which the underlying stock is Eli Lilly and Company with a current price of $56.00 per share. The strike asset is Merck, with a per share price of $52.00. Interest rates are 5% and the 3-month call option is trading for $7.00. What is the price of the put?

An investor longs a $65 strike call at $1.20, and shorts a $65 strike put at $0.90. If at expiration of the options, the investor wishes to own the security, what is the net cost of the position?

All else being equal, explain why American options are at least as valuable as European options.

The price of a non-dividend paying stock is $55 per share. A 6-month, at the money call option is trading for $1.89. If the interest rate is 6.5%, what is the likely price of a European put at the same strike and expiration?

Jillo, Inc. stock is selling for $54.70 per share. Calls and puts with a $55.00 strike and 40 days until expiration are selling for $1.65 and $1.23, respectively. Draw a profit and loss graph illustrating the arbitrage.

Jillo, Inc. stock is selling for $54.70 per share. Calls and puts with a $55 strike and 40 days until expiration are selling for $1.65 and $1.23, respectively. What potential arbitrage profit exists?

What term is used to describe the creation of a synthetic T-bill by buying the stock, buying a put and selling a call?

If today is March 10th, and four options are eligible for early exercise, which ex-dividend date is most likely to produce the highest potential profit?

Call options with strikes of $30, $35, and $40 have option premiums of $1.50, $1.70, and $2.00, respectively. Using strike price convexity, which option premium, if any, is not possible?

Using the synthetic long stock strategy, explain the difference in call and put prices.

An arbitrage investor shorts a stock at $76, longs a $75 strike call at $1.50, and shorts a $75 strike put at $0.80. What is the arbitrage profit on the strategy, per share?

Which option has the highest probability of being exercised early?

Which of the following options will NOT be exercised early?

The spot exchange rate of dollars per euro is 0.95. Dollar and euro interest rates are 7.0% and 6.0%, respectively. The price of a $0.93 strike 6-month call option is $0.08. What is the price of the put?

How is the price of a European call option impacted by a $2.00 dividend being paid immediately before expiration of a 6 month option if interest rates are 5.0%?

The necessary condition for early exercise is that we prefer to receive something sooner rather than later. With a dividend paying call and a non-dividend paying put, what do we receive?