The stock price of Google is $32. The price of an American call option with strike price $32 and a six-month expiration date is $5 and the price of the corresponding Amertican put option (same maturity and expiration date) is $6. The risk-free interest rate is 5%. Are these prices compatible with the absence of arbitrage opportunities? Why? OI. No, because the put-call parity relationship suggests that ct - Pt = St - K exp(-RO (T-t)) and this is not satisfied in this case. O II. Yes, because the price of the American put option is greater than the price of the American call option violating the inequality conditions defining the put-call parity relationship. O II. No, because the put-call parity relationship for American options suggests that St-Ks t - Pt s St -K exp(-Ro (T-t). O IV. It depends on whether the stock pays dividends or not.
Macrohedging
Hedging or hedge accounting is a risk-mitigation technique used to protect the current financial position from potential losses. Hedging is often confused with speculating. The major difference between the two is that hedging does not involve guessing, whereas speculation is based on guessing the direction of movement of the underlying asset to book profits.
Finance Mathematics
The area of applied mathematics known as mathematical finance, also known as quantitative finance or financial mathematics is concerned with the mathematical modeling of financial markets. The application of mathematical methods to financial problems is known as financial mathematics. A financial market is a place where people can exchange low-cost financial securities and derivatives. Stocks and bonds, raw materials, and precious metals, both of which are regarded as commodities in the stock markets, are examples of securities. It uses probability, statistics, stochastic processes, and economic theory as methods.
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