Assume That Call Options on Microsoft Stock with the Same

question 84

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 were 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?

---

Definitions:

Low Collateral Value

Low collateral value refers to assets that have declined in worth, offering less security for loans and reducing borrowing capacity.

Credit Scoring

A system used by lenders to evaluate the creditworthiness of potential borrowers, resulting in a score that predicts the likelihood of repayment.

Probability of Default

The probability that a borrower will fail to fulfill their debt responsibilities.

Credit Policy

The guidelines a company follows to determine the amount and terms of credit to extend to customers.