The Trade Deficit Numbers Are Expected Out on February 19,and

question 59

Essay

The trade deficit numbers are expected out on February 19,and you think that market will move a lot,either up or down.You want to take advantage of this using options.You are given the following stock-index option data for today,January 14 (the current level of the index is 236.99,and the annualized T-bill rate is 6%):

a. Find at least two options in the above listing that violate arbitrage
conditions.
b. How would you set up a position using February options to take advantage
of the volatility from the trade deficit numbers? (The February options expire
on the evening of February 19.)
c. What are the breakeven points for the position in part b? (You can draw a
payoff diagram if you want to.)
d. Assume no dividends are paid and that the variance in the stock index is
0.09, and use the Black-Scholes model to value the February 235 call and
the February 235 put.

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Definitions:

Extreme Opening Offer

An initial proposal in negotiations that is much higher or lower than what one actually expects to achieve, used as a strategic move.

Tactical Tasks

These are specific actions or responsibilities assigned to individuals or units in a military operation, aimed at achieving a particular objective in support of an overall strategy.

Distributive Bargaining

A negotiation strategy where parties compete to divide a fixed resource, often resulting in a win-lose situation.

Convey Message

The act of communicating information, thoughts, or feelings clearly and effectively to others, often with specific intent or purpose.