A speculator has a portfolio consisting of one short position on a European call
option on a share. Explain what this means and sketch the position diagram a
diagram of the overall profitloss at expiry against the security price at expiry for
this portfolio assuming that no dividends are payable, and that the initial option
premium was c
By constructing two portfolios with identical payoffs at the exercise date of the
options, derive an expression for the putcall parity of European options on a share
that has a dividend of known amount d payable prior to the exercise date.
Consider an asset with price St at time t paying a dividend at a constant dividend
yield, D Dividends are paid at the end of each year and are immediately reinvested
in the asset. The continuously compounded riskfree rate of interest is r pa Derive
the forward price, K of a contract issued at time t with maturity at time T to
trade one unit of the asset, where T t is an integer number of years. State any
assumptions you make
