Assume That Call Options on Microsoft Stock with the Same

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The Answer is <img src="https://d2lvgg3v3hfg70.cloudfront.net/TB2414/11ea6c5a_9b43_ce56_9875_27c795f3eda5_TB2414_00.jpg" alt="  Notice that, if S is between 45 and 65 at option expiration, the total payoff to the portfolio is positive. Otherwise the total payoff is zero. This portfolio has only nonnegative payoffs. But it has zero cost if the price of the 55 call is equal to the average of the prices of the other two calls. This situation cannot persist. At a cost of zero, all investors will attempt to buy an unlimited amount of this portfolio. We conclude that the price of the 55 call must be greater than the average of the prices of the other two calls. In this case, the cost of establishing the portfolio is positive, which is consistent with the nonnegative payoffs to the portfolio." class="answers-bank-image d-block" rel="preload" > Notice that, if S is between 45 and 65 at option expiration, the total payoff to the portfolio is positive. Otherwise the total payoff is zero. This portfolio has only nonnegative payoffs. But it has zero cost if the price of the 55 call is equal to the average of the prices of the other two calls. This situation cannot persist. At a cost of zero, all investors will attempt to buy an unlimited amount of this portfolio. We conclude that the price of the 55 call must be greater than the average of the prices of the other two calls. In this case, the cost of establishing the portfolio is positive, which is consistent with the nonnegative payoffs to the portfolio.

Assume That Call Options on Microsoft Stock with the Same

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Correct Answer:
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Assume That Call Options on Microsoft Stock with the Same

Essay

Correct Answer:VerifiedShow Answer

Correct Answer:
Verified