saviloe
Mar 10, 2008, 10:50 PM
I need help!!! for Financing
A stock is worth $50
A call $50 cost $5 expires in one year
A put $50 costs 4 expires in one year
A risk free bond will pay $50 in one year and costs $45
The Call =-(S-50)+5=5 If we exercise at $50 we loose $5
The call can always increase the price during the year to more than $50 creating profit.
The Put =-(50-S)+4=4 If we exercise at $50 we loose $4
The Put can also decrease to less than $50 creating profit during the year.
With the risk free bond the investor will make only $5 at the end of the year.
I appreciate any help
A stock is worth $50
A call $50 cost $5 expires in one year
A put $50 costs 4 expires in one year
A risk free bond will pay $50 in one year and costs $45
The Call =-(S-50)+5=5 If we exercise at $50 we loose $5
The call can always increase the price during the year to more than $50 creating profit.
The Put =-(50-S)+4=4 If we exercise at $50 we loose $4
The Put can also decrease to less than $50 creating profit during the year.
With the risk free bond the investor will make only $5 at the end of the year.
I appreciate any help