Question

Johnson & Johnson (JNJ) is currently trading for $151.30 per share. You see that one month calls and puts with strike prices of $140 have premiums of $16 and $5, respectively. The annual risk free rate is 1%. What is your per share arbitrage profit? Note: Answer in dollars, round to the nearest cent.

Answer 1

As per Call Put Partiy

where r is the risk free rate of return i.e. 0.01

t is the time period 1 / 12 = 0.08333333333

140 * e^(-0.01*0.08333333333) + 16 = 151.30 + 5

140 * e^(-0.00083333333) + 16 = 151.30 + 5

140 * 0.99916701379 + 16 = 151.30 + 5

139.88338193 + 16 = 156.3

155.88338193   156.3

Since LHS is not equal to RHS, arbitrage is possible.

Buy Call Option since it is undervalued.

Sell Stock since it is overvalued.

Arbitrage Profits = 156.3 - 155.88338193 = 0.417 per option.

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