Chapter 20
Portfolio 1
Portfolio 2
Portfolio 1 and 2 have identical payoffs so they must be worth the same amount or else there would be an arbitrage opportunity.
Put-Call Parity Arbitrage
The equilibrium value of the put is
If the put is selling for $5 then an arbitrage opportunity exists.
Buy the Stock and borrow the present value of the exercise price
Cash flow in six months
Black Scholes Option Pricing Model
Example of Black Scholes Model
Solution to B-S Problem
The Hedge Ratio
How do you calculate the hedge ratio?
Example of Hedge
Example of Hedge (cont.)
Additional Option Strategies
Covered Put
Protective Call
The Long Straddle
The Short Straddle
The Bull Spread
The Bear Spread
The Butterfly Spread
Email: jfarinel@fgcu.edu
Home Page: http://itech.fgcu.edu/faculty/jfarinel
Download presentation source