Equilibrium Price Definition of Terms Call Option on a Security

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Definition of Terms
Equilibrium price can be defined as the market price in which the supplied goods are
totally equal to the goods in demand. When a graph of price against quantity is drawn, the point
at which supply and demand curves intersect is the equilibrium price.
A call option on a security is an agreement that provides the choice buyer the correct, to buy a
bond, commodity, a stock, but not limited to obligation. It gives the holder the chance to buy
hundred percent shares of an original stock at a given specific price. The underlying price is
called the strike price.
A put option on Security is a choice agreement that gives the owner the right to sell a definite
volume of an underlying security at a given price within a stipulated period of time.
We simply need to check whether D’Ψ = p has a positive solution.
D= [20 44 12
48 36 12 ]
[20 48
44 36
12 12 ][24
40
12 ] ¿
Ψ = [1 /4, 1/4, 1/2], so a state price vector exists. The equilibrium price measures, there is only
one unique EPM and because rf = 0, the EPM is equivalent to Ψ.
(a) A call option on security 1 with an exercise price of 25.

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The payo s of this option are given by X = [0, 0, 23]. Using the state price vector Ψ foundff
above, the price of X is P(X) = X ·Ψ = 23/2.
(b) A put option on security 2 with an exercise price of 40.
The payo s for this choice is given by X = [4,4,0]. Now, computing using the state price vectorff
Ψ found above, the price of X is P(X) = X ·Ψ = 2.

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References
Beghin, J. & Beladi, H. (2013). Nontariff measures with market imperfections: trade and welfare
implications. Bingley, U.K: Emerald.
Rosen, L. (1974). How to trade, put, and call options: the new and proven way to stock market
profits. Homewood, Ill: Dow Jones-Irwin.
Vries. (2010). Measuring and explaining house price developments. Amsterdam: IOS Press
Salopek, D. (1997). American put options. Harlow, Essex, England: Longman.

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