The trade deficit numbers are expected out on February 19,and you think that market will move a lot,either up or down.You want to take advantage of this using options.You are given the following stock-index option data for today,January 14 (the current level of the index is 236.99,and the annualized T-bill rate is 6%):

a. Find at least two options in the above listing that violate arbitrage
conditions.
b. How would you set up a position using February options to take advantage
of the volatility from the trade deficit numbers? (The February options expire
on the evening of February 19.)
c. What are the breakeven points for the position in part b? (You can draw a
payoff diagram if you want to.)
d. Assume no dividends are paid and that the variance in the stock index is
0.09, and use the Black-Scholes model to value the February 235 call and
the February 235 put.

Question

The trade deficit numbers are expected out on February 19,and you think that market will move a lot,either up or down.You want to take advantage of this using options.You are given the following stock-index option data for today,January 14 (the current level of the index is 236.99,and the annualized T-bill rate is 6%):

a. Find at least two options in the above listing that violate arbitrage
conditions.
b. How would you set up a position using February options to take advantage
of the volatility from the trade deficit numbers? (The February options expire
on the evening of February 19.)
c. What are the breakeven points for the position in part b? (You can draw a
payoff diagram if you want to.)
d. Assume no dividends are paid and that the variance in the stock index is
0.09, and use the Black-Scholes model to value the February 235 call and
the February 235 put.

Quizplus · Accepted Answer

The Answer of The trade deficit numbers are expected out on February 19,and you think that market will move a lot,either up or down.You want to take advantage of this using options.You are given the following stock-index option data for today,January 14 (the current level of the index is 236.99,and the annualized T-bill rate is 6%):

a. Find at least two options in the above listing that violate arbitrage
conditions.
b. How would you set up a position using February options to take advantage
of the volatility from the trade deficit numbers? (The February options expire
on the evening of February 19.)
c. What are the breakeven points for the position in part b? (You can draw a
payoff diagram if you want to.)
d. Assume no dividends are paid and that the variance in the stock index is
0.09, and use the Black-Scholes model to value the February 235 call and
the February 235 put.

The Trade Deficit Numbers Are Expected Out on February 19,and