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: Stock price Risk-free rate Exercise price 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.
