Problem:
Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of accuracy. The economic research staff would like to know which variables to monitor if options are ultimately used by the firm. Write a 2-3 page document to Mr. Curtis explaining how the listed variables impact the prices of call options and what the associated theory is behind each relationship:
1.stock price
2.risk-free rate
3.exercise price
4.stock volatility
It is also important to recognize if put-call parity conditions are being met; if not, an arbitrage opportunity exists for the firm. In the following situation, identify whether or not an arbitrage opportunity exists if the:
call price = $1.15.
exercise price = $22.50.
time to expiration = 60 days.
put price = $0.55.
annual interest rate = 12%.
the stock pays zero dividends.
Mr. Curtis and Mrs. Kesich think that option strategies need to be developed due to future foreign currency transactions that will occur when their contract with an Italian high-tech firm is finalized. They first need you to construct a memo of 5 paragraphs in length on various hedging strategies including a bull spread, a butterfly spread, and a ratio spread.