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Options trading –

Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of accuracy. The economic research staff would like to know which variables to monitor if options are ultimately used by the firm. Write a 2–3 page document to Mr. Curtis explaining how the listed variables impact the prices of call options and what the associated theory is behind each relationship:

  1. Stock price
  2. Risk-free rate
  3. Exercise price
  4. Stock volatility

It is also important to recognize if put-call parity conditions are being met; if not, an arbitrage opportunity exists for the firm. In the following situation, identify whether or not an arbitrage opportunity exists if

  • The call price = $1.15.
  • Exercise price = $22.50.
  • Time to expiration = 60 days.
  • Put price = $0.55.
  • Annual interest rate = 12%.
  • The stock pays 0 dividends.
 
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