Your firm has a well­respected economic research staff. The staff members have been successful in

developing econometric models that can predict macroeconomic variables with a surprisingly degree

of accuracy. The economic research staff would like to know which variables to monitor if options are

ultimately used by the firm. Write a 2–3 page document to Mr. Curtis explaining how the listed

variables impact the prices of call options and what the associated theory is behind each relationship:

Stock price

Risk­free rate

Exercise price

Stock volatility

It is also important to recognize if put­call parity conditions are being met; if not, an arbitrage

opportunity exists for the firm. In the following situation, identify whether or not an arbitrage

opportunity exists if

The call price = $1.15.

Exercise price = $22.50.

Time to expiration = 60 days.

Put price = $0.55.

Annual interest rate = 12%.

The stock pays 0 dividends.

 

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