Question

CSL share price is currently $270. The riskfree rate of interest is 4% per annum continuously compounded.

A European call option written on CSL with a $275 strike price is trading at $34.82.

A European put option written on CSL with a $275 strike price is trading at $29.85. Both of these options expire one year from now.

Given the observed market prices for these CSL options noted above, there is no mispricing that would allow an arbitrage profit:

Select one:

True

False

Impossible to determine without further information.

Answer 1

False

The put-call parity signifies that

C + X*e^(-rt) = S + P

where C is the call option price with strike price X and time to maturity t

P is the put option price with strike price X and time to maturity t

r is the riskfree rate

Then, according to the question

34.82 + 275*e^(-0.04*1) = 270 + 29.85

299.037 = 299.850

Since the put call parity does not hold true, there exists an arbitrage opportunity. Hence there is a mispricing.

Hence, the statement is FALSE