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 $17 and $5, respectively. The annual risk free rate is 1%. What is your per share arbitrage profit?

Answer 1

Ans ) Spot price or market price per share,S = $ 151.30 per share.

Strike price or excercise price = $ 140

Value of Call , C = $ 17

Value of Put, P = $ 5

Annual risk free rate = 1%

According to the Put call parity

C+ Present value of Strike price = P+S ------eq 1.

C +Present value of strike price = 17+140*e^0.01*0.0833 = 157.11

P+S = 151.30+5 = 156.3

Since C+Present value of strike price > P+S

Hence there is opportunity for arbitrage

Hence by selling the most expensive side of the equation and buying the less expensive side the arbitrge profit can be earned. Hence in this case Call is to be sell and Put is to be purchased