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Introduction
600
500
400
300 OTC
200 Exchange
100
Source: Bank for International Settlements. Chart shows total principal amounts for
OTC market and value of underlying assets for exchange market
Options, Futures, and Other Derivatives, 11th Edition,
Copyright © John C. Hull 2021 7
The Lehman Bankruptcy (Business
Snapshot 1.1)
Profit
Price of Underlying at
K Maturity, ST
Profit
Price of Underlying
K at Maturity, ST
Suppose that:
The price of a non-dividend-paying stock is
$60
The 1-year forward price of the stock is $65
The 1-year US$ interest rate is 5% per
annum
Is there an arbitrage opportunity?
Strike Jun 2020 Jun 2020 Sep 2020 Sep 2020 Dec 2020 Dec 2020
Price Bid Ask Bid Ask Bid Ask
290 29.80 30.85 39.35 40.40 46.20 47.60
Strike Jun 2020 Jun 2020 Sep 2020 Sep 2020 Dec 2020 Dec 2020
Price Bid Ask Bid Ask Bid Ask
290 3.00 3.30 12.70 13.65 20.05 21.30
35,000
No Hedging
30,000 Hedging
25,000