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?

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Definitions:

Cognitive Dissonance

A psychological discomfort experienced when holding two or more conflicting beliefs, values, or attitudes typically leading to a change in beliefs or behaviors to reduce the discomfort.

Social Learning Theory

A theory that suggests people can learn new behaviors and information through observing others, emphasizing the importance of modeling, imitation, and social reinforcement.

Imitation and Modeling

The act of mimicking the behavior, gestures, or speech of others as a method of learning, often a key process in the development of social skills and behaviors.

Aversion and Terror Management

Theories that explore human behavior and cognition relating to avoiding fear, death, and existential terror, often via clinging onto cultural beliefs or self-esteem enhancing activities.