Question 1

Jillo, Inc. stock is selling for $54.70 per share. Calls and puts with a $55.00 strike and 40 days until expiration are selling for $1.65 and $1.23, respectively. Draw a profit and loss graph illustrating the arbitrage.

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Question 2

Explain in simple terms why a call option on a non-dividend paying stock should never be exercised early.

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Question 3

The necessary condition for early exercise is that we prefer to receive something sooner rather than later. With a dividend paying call and a non-dividend paying put, what do we receive?

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Question 4

Using the synthetic long stock strategy, explain the difference in call and put prices.

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Question 5

All else being equal, explain why American options are at least as valuable as European options.

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Quiz 9: Parity and Other Option Relationships

Jillo, Inc. stock is selling for $54.70 per share. Calls and puts with a $55.00 strike and 40 days until expiration are selling for $1.65 and $1.23, respectively. Draw a profit and loss graph illustrating the arbitrage.

Explain in simple terms why a call option on a non-dividend paying stock should never be exercised early.

The necessary condition for early exercise is that we prefer to receive something sooner rather than later. With a dividend paying call and a non-dividend paying put, what do we receive?

Using the synthetic long stock strategy, explain the difference in call and put prices.

All else being equal, explain why American options are at least as valuable as European options.