Three European call options with different strikes expire in 6 months. The risk free rate is .055, the options with strike 50 and strike 70 cost 22.96 and 10.67. if the other option has strike 60 what can we say about this price in no arbitrage environment?
Solution:
i) 10.67<=c(60) <= 22.96
ii) 22.96 - c(60) <= 10e^-.055(.5)
iii)c(60)-10.67 <= 10e^-.055(.5)
iv) (22.96-c(60)/10)>=(c(60)-10.67/10)
The answer kept ii and iv and got
13.23<=C(60)<=16.815
How come we didn't use iii?
Solution:
i) 10.67<=c(60) <= 22.96
ii) 22.96 - c(60) <= 10e^-.055(.5)
iii)c(60)-10.67 <= 10e^-.055(.5)
iv) (22.96-c(60)/10)>=(c(60)-10.67/10)
The answer kept ii and iv and got
13.23<=C(60)<=16.815
How come we didn't use iii?
Strike price effects question
