The prices used for these eight options will be the midpoints between the respective bids and offers. While the implied volatilities for these eight options should be calculated using a cash dividend-adjusted binomial method to account for the facts that OEX index options are American style and that the underlying index portfolio pays discrete cash dividends, we will use the traditional Black-Scholes model for European options to derive all required implied volatilities. Forecasting dividends for the 100 stocks that make up the index is beyond the scope of this book.
The goal of this transfer system is to ensure that all individuals can still afford their autarky choices ) v , c ( ha ha . To see that this is indeed the case, substitute these autarky choices into the budget constraint (6.
is commonly referred to as operating income.