F
QUESTION 2 (11 marks)
The following subset of options data for BHP shares was obtained from the ASX website on September 15, 2016. All options are American.
Option
Strike ($)
Bid ($)
Offer ($)
Open interest
Expiry: Sept 29, 2016
Call
20.000
0.505
0.570
11,467
Put
20.000
0.460
0.565
6,695
Call
23.000
0
0.050
10,013
Put
23.000
3.080
3.080
590
Call
32.500
0
0
0
Put
32.50
12.580
12.580
0
Expiry: Dec 22, 2016
Call
20.110
1.240
1.400
4,787
Put
20.110
1.245
1.410
3,788
Call
22.910
0.295
0.385
2,897
Put
22.910
3.280
3.280
219
Call
32.270
0.001
0.001
0
Put
32.270
12.200
12.200
284
Expiry: Dec 21, 2017
Call
20.570
2.530
2.530
173
Put
20.570
3.155
3.155
80
Call
23.380
1.490
1.490
44
Put
23.380
4.875
4.875
45
Call
32.730
0.165
0.165
1,043
Put
32.730
12.350
13.150
2,500
Other details as at September 15, 2016 include:
BHP share price $20.01
Cash rate target 1.50% p.a
Two year note yield 1.57% p.a
10 year government bond yield 2.10% p.a
You are also provided with the following history of BHP dividends in the file “BHP dividends.pdf”.
For all of the appropriate option pairs listed, determine whether the calls and puts are fairly priced in accordance with no arbitrage pricing principles. Assume that there are 252 trading days in a year. Show all calculations in a spreadsheet and present your results in a Table in your word document. Clearly state all assumptions. (6 marks)
Comment on your findings and provide justifications for any violations in arbitrage pricing (if any). (5 marks)
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