913 Generalization(continued) Proof with an Example This is known as the No Arbitrage methodology n our earlier example′0.633and△=025 f0.633,eg.=0.0 △S-=025*20-0.6=44>4.367 t=0 Sr=18 S=22 Buy call 0.600 0 Sella shares5.000-18*0.25=-4.50-22*0.25=-5.50 Lend4.367atr-4.367 4.50 4.50 Net flows 0.033 0 0 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal UniversityOptions, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 9.13 Generalization (continued) : Proof with an Example • This is known as the No Arbitrage methodology • In our earlier example f=0.633 and D=0.25 • If f<0.633, e.g. f=0.60 ==> D S0 -f=0.25*20-0.6=4.4>4.367 t = 0 ST=18 ST=22 Buy call -0.600 0 1 Sell D Shares 5.000 -18*0.25=-4.50 -22*0.25=-5.50 Lend 4.367 at r -4.367 4.50 4.50 Net Flows 0.033 0 0 •