Assignment

Your firm has a well-respected economic research staff. The staff members have been successful in developing econometric models that can predict macroeconomic variables with a surprisingly degree of accuracy. The economic research staff would like to know which variables to monitor if options are ultimately used by the firm. Write a 2-3 page document to Mr. Curtis explaining how the listed variables impact the prices of call options and what the associated theory is behind each relationship:

1. Stock price
2. Risk-free rate
3. Exercise price
4. Stock volatility

It is also important to recognize if put-call parity conditions are being met; if not, an arbitrage opportunity exists for the firm. In the following situation, identify whether or not an arbitrage opportunity exists if

• The call price = $1.15.
• Exercise price = $22.50.
• Time to expiration = 60 days.
• Put price = $0.55.
• Annual interest rate = 12%.
• The stock pays 0 dividends.