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Answers to IM Extra Credit Questions
The correct valuation as of this date for the next available in the money call is $.16022. The next
available in the money put is .40482. However, the current market price of the $12.50 April 20th
expiration call trading on the CBOE as of 4/12/13 is a bid of 9 cents and an ask of 10 cents.
Therefore we see a discount to value of about 7 cents on the bid side, which equals a discount of
nearly 40% of implied value.
If there is a discount on the call and a premium, it shows a higher demand for downward
protection, however, BAC is a market bellwether, thus held institutionally, thus this could be
more hedge protection against possible increase against possible stock price decrease opposed to
actual expectation of price decrease. However, given inflated values of current market
conditions, we would feel comfortable placing a hedge to protect any core position.
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