Suppose the current stock price S is greater than the strike K, interest rates and...
90.2K
Verified Solution
Link Copied!
Question
Finance
Suppose the current stock price S is greater than the strike K, interest rates and dividends are zero. We buy 100 shares of stock at price S, and instruct our broker to sell the stock if its price drops to K and place the proceeds in default-free bonds. We also borrow K dollars at the risk-free rate. Naively, one might think this stop-loss order would provide the same kind of insurance as a call. Explain why this is naive, by explaining in detail all of the possible ways in which the payouts from this setup could differ from the payouts of owning a call with strike K.
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
