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    trades

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    Please help with the following problem about international trade. Provide step by step calculations in the solution.

    You observe that a non-dividend paying stock, with a current price of $50, has 1-year American calls and puts written on it, both with exercise prices of $50. The 1-year interest rate is 10%.

    (a). If the calls were trading at $10 and the puts at $3, what trades would you enter into?

    (b). If the calls were trading at $5 and the puts at $5, what trades would you enter into?

    [Hint: an important thing in Q#2 is to determine whether you will (or will not) enter into such trades and why (or why not)]

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    https://brainmass.com/economics/trade-agreements/trades-364901

    Solution Preview

    Dear Student,

    Please see below for the step by step procedure in solving the problem

    OTA 108347

    First, list the given information.
    S0 = Current stock price = $50
    X = Exercise price = $50
    r = 1 year interest rate = 10%
    T = time = 1

    Second, solve for the problems
    (a). If ...

    Solution Summary

    Buy call and sell put options are demonstrated. Step by step calculations are provided in the solution.

    $2.19