Explore BrainMass

Option Pricing Followup Questions

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Can you give me some very brief answers to my questions?

Option Pricing
- What is the law of one price?
- How do you determine lower and upper bounds?
- How do you use put-call parity?
- What is the binomial option-pricing model?
- How do you calculate option premiums using the binomial pricing model and put-call parity?

The Black-Scholes Option Pricing Model.
- What is the Black-Scholes option-pricing model?
- How do you apply the Black-Scholes option-pricing model?
- What is historical volatility?
- How do you find implied volatility?
- What is Merton's model?

© BrainMass Inc. brainmass.com October 24, 2018, 7:28 pm ad1c9bdddf

Solution Preview


- The Law of one price is an economic rule which states that in an efficient market, a security must have a single price, no matter how that security is created. For example, if an option can be created using two different sets of underlying securities, then the total price for each would be the same or else an arbitrage opportunity would exist.

- Upper bounds: in the case of a call option, it cannot be worth more than the stock price. If there is a violation of this rule, then arbitrageurs will enter and make a riskless profit by buying the stock and selling the call option. In the case of a put option, the upper bound is the strike price at which the contract has been entered. If this condition is violated then an investor can make use of the arbitrage opportunity by writing the option and investing the proceeds at the risk-free rate of interest.

- Lower bounds: the lower bound for a call option is the difference between the stock price and the discounted value of the strike price at the risk-free rate of interest. If the call price violates this rule, investors can arbitrage by buying the call option and selling the ...

See Also This Related BrainMass Solution

Marketing: least used element, effective pricing strategy, distribution channel options

1. Within a financial planning organization what element of the promotional mix is used least? How could this element be increased to enable a more effective promotional mix? What would you recommend and why?

2. What are three lessons learned relative to the importance and effectiveness of various pricing strategies? What are the three lessons learned relative to the importance and effectiveness of distribution channel options? As a result, what concepts and analytic tools will you be able to use in developing a Market Audit?

View Full Posting Details