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. Herman explaining how the listed variables impact the prices of put options and what the associated theory is behind each relationship:
exercise price
time
stock price
implied 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
call price = $1.15.
exercise price = $22.50.
time to expiration = 17 days.
put price = $0.55.
annual interest rate = 1.2%.
the stock pays zero dividends.