Assignment 4: Written Paper 3 (Week 6)
not required except as specified in assignment instructions
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Mr. Curtis document
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 1-2 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:
•. Stock price
•. Risk-free rate
•. Exercise price
•. 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 0 dividends.
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