Suppose the current stock price S is greater than the strike K, interest rates and...
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Suppose the current stock price S is greater than the strike K, interest rates and dividends are zero. We buy 100 shares of stock at price S, and instruct our broker to sell the stock if its price drops to K and place the proceeds in default-free bonds. We also borrow K dollars at the risk-free rate. Naively, one might think this stop-loss order would provide the same kind of insurance as a call. Explain why this is naive, by explaining in detail all of the possible ways in which the payouts from this setup could differ from the payouts of owning a call with strike K.
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