1. Financial Market Theory
Thursday, November 30, 2017
Professor Edwin T Burton

2. 2nd Mid-Term Exam Pick-Up and Grading Reviews
Exams can be picked up tomorrow, Friday, December 1st in Monroe Hall Basement between 12:30 PM and 2 PM
Grading reviews will be Tuesday, December 5th between 2 PM and 4 PM in the Monroe Basement

3. More on Options Put-Call Parity
The Cox-Ross Example: Why Expected Return of the Stock Doesn’t Matter

4. Put-Call Parity Stock Call
That gives enough information to create a put

5. Example of Put-Call Parity
Buy 100 shares of Stock
Buy one Jul 40 Put (covers 100 shares)
Sell one Jul 40 Call (covers 100 shares)
What will happen at expiration?
Stock above 40
Call is exercised
Put expires worthless
Stock below 40
Call expires worthles
Put is exercised
In either case 100 shares of stock is sold at $ 40 for $ 4,000

6. Do some numbers Buy stock at 38 But put at 3 Sell call for ?
Gross dollar proceeds = $ 40
So (40-x)/x must equal the risk free rate
Suppose transaction is for 3 mos, Rf =12%
Then (40-x)/x = .04, so x = 38.46, call =2.54
Since x = – call or = – call
Or Call = = 2.54

7. Imagine only two possible
The Cox-Ross Example
Short Calls
Long 2 shares at 50
Borrow $ 40 at 25%
Imagine only two possible
prices, 25 and 100
At 25, zero result
At 100, zero result
Call must be 20

8. Review for Final Exam – Sat, Dec 9 2PM
All readings, lectures, powerpoint presentations are covered by final exam
The exam is cumulative
Probably 40 – 50 percent of the final is material not covered on 1st and 2nd mid-terms
Important topics:
Capital Asset Pricing Model
Finite States
Arbitrage Pricing Theory
Junk Bonds and ABS
Futures and Options
Should take about 2 hours; you will have three hours