Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option.
Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X. As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function. Complete the equation for the value of a put option.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Consider two portfolios A and B. At the expiration date, t, both portfolios have identical payoffs. Portfolio A consists of a put option and one share of stock. Portfolio B has a call option (with the same strike price and expiration date as the put option) and cash in the amount equal to the present value (PV) of the strike price discounted at the continuously compounded risk-free rate, which is Xe−rRFtXe−rRFt. At expiration, the stock price is Ptt, and the value of this cash will equal the strike price, X.
As defined in the Black–Scholes model, let N(didi) stand for probability that a deviation less than didi will occur in a standard normal distribution and N(d₁) and N(d₂) represent areas under a standard normal distribution function.
Complete the equation for the value of a put option.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education