Assume That Call Options on Microsoft Stock with the Same

question 2

Essay

Assume that call options on Microsoft stock with the same exercise date in October are available with exercise prices $45, $55, and $65. Also assume that the price of the middle call is the average of the other two calls. Show that if you sell two of the middle calls and use the proceeds to buy one each of the other calls, your proceeds in October may be positive but cannot be negative despite the fact that your net outlay today is zero. What can you deduce from this example about option pricing?

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Definitions:

Anorexia Nervosa

An eating disorder characterized by an abnormally low body weight, an intense fear of gaining weight, and a distorted perception of body weight or shape.

Hypokalemia

A medical condition characterized by lower-than-normal levels of potassium in the bloodstream, which can affect heart and muscular function.

Laxatives

Substances that promote bowel movements and are used to treat or prevent constipation, often by softening stools or increasing their passage through the bowels.