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 Post subject: Call option and Put optionPosted: Fri, 9 Apr 2010 11:51:25 UTC
 S.O.S. Oldtimer

Joined: Tue, 5 Oct 2004 19:30:38 UTC
Posts: 281
Location: England,Ilford
I have so much difficulties understanding call and put options concept properly.

Let C be the price of a call option to purchase a stock whose present price is S. Suppose that interest is compounded continuously at nominal rate r. Show that if

C>S, then buying one stock and selling one call gives an arbitrage opportunity. What relationship do you conclude must exist between S and C if there is to be no arbitrage opportunity?

Solution: Suppose C>S. Buying a stock and selling a call will give you C-S>0. ( I know call option is the right(but not the obligation to purchase stock at expiration time t for strike price K but what do they mean by selling a call? what do you really sell? how does it change if you sell 10 calls or buy a 5 puts etc?). Put C-S>0 in the bank at time t you will have in the bank and a stock.

Thanks for any help.

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 Post subject: Posted: Sun, 11 Apr 2010 00:11:56 UTC
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