Hi,
I am reviewing some problems and have a question from Exercise 2.1 from the ASM manual.
Question:
The current price of a stock is 35. Let C(S,K,T) and P(S,K,T)) be European calls and puts respective on the stock with stike price K and expiry T.
Which of the following statements are true?
I. P(S,35,T) >= 35e^(-rT) - 35e^(-𝛿T)
II. P(S,35,T) - C(S,30,T) >= 30e^(-rT) - 35e^(-𝛿T)
II. P(S,35,T) - C(S,30,T) >= 35e^(-rT) - 35e^(-𝛿T)
It says that one of the correct answers is I:
By put call parity, P(S,35,T) - C(S,35,T) = 35e^(-rT) - 35e^(-𝛿T). Then it says C(S,35,T) >=0.
So, P(S,35,T)>=35e^(-rT) - 35e^(-𝛿T).
How do we know C(S,35,T) >=0?
The other correct answer is II.
I am reviewing some problems and have a question from Exercise 2.1 from the ASM manual.
Question:
The current price of a stock is 35. Let C(S,K,T) and P(S,K,T)) be European calls and puts respective on the stock with stike price K and expiry T.
Which of the following statements are true?
I. P(S,35,T) >= 35e^(-rT) - 35e^(-𝛿T)
II. P(S,35,T) - C(S,30,T) >= 30e^(-rT) - 35e^(-𝛿T)
II. P(S,35,T) - C(S,30,T) >= 35e^(-rT) - 35e^(-𝛿T)
It says that one of the correct answers is I:
By put call parity, P(S,35,T) - C(S,35,T) = 35e^(-rT) - 35e^(-𝛿T). Then it says C(S,35,T) >=0.
So, P(S,35,T)>=35e^(-rT) - 35e^(-𝛿T).
How do we know C(S,35,T) >=0?
The other correct answer is II.
Exercise 2.1 from ASM Manual
