Chapter 10.3 to 10.

No-arbitrage bounds can be derived from put-call parity

Arbitrageur could buy the less expensive portfolio and sell the more expensive one if put-call parity

is not in equilibrium

Long call + short put or Short call + long put locks in the price the stock will be bought/sold

Put-call parity can be used to determine capital structure of the form

c! + PV(K ) = p + A0

Where value of equity = c! , value of debt = !PV(K ) − p, and !A0 is the assets of the company today

For American put-call parity:

! 0 − K ≤ C − P ≤ S0 − Ke −rT
S

Chapter 11.2 to 11.3

A bull spread strategy limits the investor’s upside as well as downside risk

Bull spreads become more conservative as the calls move from both out-of-the-money to one-in-

and-one-out to both in-the-money

Price of European call is the same as the price of an American call when there are no dividends

Box spreads do not work on American options as put options can be exercised against you

immediately