Question

1. Tabulate the portfolio value and graph BOTH the value and Payoff for the following portfolio:

Long July Call E = $65 C₆₅ = $3.50 and Short July Call E = $75 C₇₅ = $1.50

2. Applying the Put-Call Parity,

1. Create a synthetic Put

E = 90 ,S = $87, C = $2.50, RF = 1.5%, t = 90 days

2. If the Put is trading at $6, does an arbitrage opportunity exist? If so how would you take advantage? Calculate the arbitrage profit

Answer 1

(a)   

(b) Yes there is arbitrage opportunity existing in the market.To take advantage of that we will buy put option at $5.16.