Question

6. Given the following market prices determine what arbitrage trading situation exists and what the expected profit would be for this trade –

XYZ @ 41.00

XYZ 40 Call @ 2.00

XYZ 40 Put @ 0.50

Answer 1

>> Arbitrage is a way through which one fixes little loss or zero loss and small profits. It will help in risk management.

>> Here both the Call options and put options are having the same strike price. that is 40.

Here market price is 41, so in this case put option will not be exercised , and we have paid premium for call option 2

so in this case when market price is at 41

profit = market price-strike price- premium

= 41-40-2

= -1

here also we have paid premium of 0.50 for put option

so in total we have loss of -1.50

>> If price go above 43 than we will have profit

=43-40-2-0.50

=0.50

>> If stock market price go below 40 to 37 than we will use put option utilization which will give profit of around 0.50

and call option will not be utilised/