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1) A call and a put on same stock have similar strike price and time to maturity. At 10:00am on the certain day, price of call is $3 and price of put is $4. At 10:01am news reaches market which has no effect on stock price or interest rates, but increases volatilities. Thus price of call changes to $4.50. What would you expect price of put to change to?

2) You can purchase shares of stock at= $101 and sell shares at= $100. You can borrow money at 5% and lend money at 3%. Next year in the up state, you can purchase or sell shares of stock at= $110. Next year in down state, you can purchase or sell shares of stock at=$90. Assume you see one-year European call option with strike price of= $100. Determine the possible range of no-arbitrage call option prices allowed today?

Basic Finance, Finance

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