Markets: A Rigorous Course

M09A · Problem 2 ★★ Check

Max pain on a small chain

A weekly chain has the following OI, in lots:

Strike 24,000 24,100 24,200 24,300 24,400
Call OI 20 40 90 150 120
Put OI 140 160 100 30 10

(a) Compute W(x)W(x) at each strike (in lot-points) and the max pain strike. Give WW at max pain in rupees. (b) Verify the subgradient condition of Proposition 9A.3 at max pain. (c) Compute PCROI\mathrm{PCR}_{OI}. (d) Add 300 lots of put OI at 24,000. What happens to WW at each strike and to max pain? Then (starting again from the original chain) add 100 lots of calls and 100 lots of puts at 24,400. What happens to max pain? Explain both results with (9A.5).

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