What does that tell us about how to price the options

Assignment Help Risk Management

Reference no: EM13925769

Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. The underlying rate is an m-day rate and pays off based on 360 days in a year. Now consider a put option on a $1 face value zero coupon bond that pays interest in the add-on manner (as in Eurodollars) based on the rate L. The exercise rate is X. Show that the in- terest rate call option with a notional principal of $1 provides the same payoffs as the interest rate put option if the notional principal on the put is $1(1 þ x(m/360)) and its exercise price, X, is $1/(1 þ x(m/360)). If these two options have the same payoffs, what does that tell us about how to price the options?

Reference no: EM13925769

Questions Cloud

Paid the balance of the sales tax due : Prepare the closing entries and post them to the T- accounts.

Describe an organization with which you are familiar : describe an organization with which you are familiar and which appears to fit the characteristics of a bureaucracy, as listed in Our Social World: An Introduction to Sociology.

Profit generating mechanism on prices : In practice, arbitrage refers to the profit generating mechanism on prices that temporarily deviate from the theoretical or perceived equilibrium relationship

Oklahoma manufacturing company : Oklahoma Manufacturing Company uses a standard cost accounting system. In 2012, the company produced 28,500 units. Each unit took several pounds of direct materials and 1½ standard hours of direct labor at a standard hourly rate of $13.00.

What does that tell us about how to price the options : Consider a call option with an exercise rate of x on an interest rate, which we shall denote as simply L. If these two options have the same payoffs, what does that tell us about how to price the options?

What are the benefits of studying sociology : Which of the social sciences (for example: psychology, political science, economics, anthropology, gender studies) strikes you as closest to sociology? Which is most distinct? Why?

Ethical decision making in a workplace : In this essay I plan to explain the importance of practicing ethical decision making in a workplace by detailing three common characteristics of poor decision making, identifying three methods of resisting unethical requests,

Advent of project management : Question 1: The advent of project management has been most profound in Question 2: Which of the following is the number one characteristic that is looked for in management candidates?

Gourmand cooking school : The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers that it uses in its budgeting and performance reports-the number of courses and the total number of students.

User Account

All Pages