Posted: March 15th, 2024

Chapter 9. No-Abitrage Restrictions on Option Prices

1.
What is meant by payout protection? Are options payout protected?

2. How does the payment of an unexpected dividend a ect (a) call
prices and (b) put prices?

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3. As we have seen, options always have non-negative value. Give an
example of a derivative whose value may become negative.

4.
What are the upper and lower bounds on call option prices?

5.
What are the upper and lower bounds on put option prices?

6.
What is meant by the insurance value of an option? Describe how it
may be measured.

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7.
What does the early-exercise premium measure?

8.
What is meant by convexity of option prices in the strike price?

9. There are call and put options on a stock with strike 40, 50, and
55. Which of the following inequalities must hold?

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(a)
0:5C(40) + 0:5C(55) > C(50)

(b)
(1=3)C(40) + (2=3)C(55) > C(50)

(c)
(2=3)C(40) + (1=3)C(55) > C(50)

(d)
0:5P (40) + 0:5P (55) > P (50)

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(e)
(1=3)P (40) + (2=3)P (55) > P (50)

(f)
(2=3)P (40) + (1=3)P (55) > P (50)

Note: This question uses the general form of
convexity in the strike for options: wC(K1) + (1 w)C(K3) C(K2)

and

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wP (K1) + (1 w)P (K3) P (K2)

where

w=K3K2K3 K1

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