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:
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.