Your firm has a well-respected 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: 1. stock price 2. risk-free rate 3. exercise price 4. stock volatility
It is also important to recognize if put-call 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 zero dividends.
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