Question

A European call option and put option on a stock both have a strike price of...

A European call option and put option on a stock both have a strike price of $25 and an expiration date in four months. Both sell for $4. The risk-free interest rate is 6% per annum, the current stock price is $23, and a $1 dividend is expected in one month. Identify the arbitrage opportunity open to a trader.

Homework Answers

Answer #1

Here,

X= 25 T -t = 4 month = 1/3 C = P = 4 r = 6% = 0.06 St = 23 D1 = 1 t1 - t = 1 month= 1/12

The call price is $4 ,

using put call formula for above information

= C + Xe-r(T- t) + D1e- r(t1-t)

4+ 25e -0.1 1/3 + 1e 0.1 -1/12 = P + 23

it above 4 so, the put is undervalued relative to call.

here arbitrage opportunity is buy the stock. ( buy the put and short the call)

The cost is 23 and the stock price in four month greater than 25.

Put call formula are given below ;-

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A European call option and put option on a stock both have a strike price of...
A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $2. The risk-free interest rate is 5% per annum, the current stock price is $25, and a $1 dividend is expected in one month. Identify the arbitrage opportunity open to a trader.
A European call option and put option on a stock both have a strike price of...
A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $3. The risk-free interest rate is 10 % per aunum, the current stock price is $19 , and a $1 dividend is expected in one month. identify the arbitrage oppotunity to a trader.
1. A European call option and put option on a stock both have a strike price...
1. A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19, and a $1 dividend is expected in one month. Is there an arbitrage opportunity? If there is an arbitrage opportunity, clearly state what condition must be satisfied to eliminate the arbitrage opportunity. What is the strategy followed...
The strike price for a European call and put option is $56 and the expiration date...
The strike price for a European call and put option is $56 and the expiration date for the call and the put is in 9 months. Assume the call sells for $6, while the put sells for $7. The price of the stock underlying the call and the put is $55 and the risk free rate is 3% per annum based on continuous compounding. Identify any arbitrage opportunity and explain what the trader should do to capitalize on that opportunity....
A European call option on a stock with a strike price of $50 and expiring in...
A European call option on a stock with a strike price of $50 and expiring in six months is trading at $14. A European put option on the stock with the same strike price and expiration as the call option is trading at $2. The current stock price is $60 and a $1 dividend is expected in three months. Zero coupon risk-free bonds with face value of $100 and maturing after 3 months and 6 months are trading at $99...
A European call option on a stock with a strike price of $50 and expiring in...
A European call option on a stock with a strike price of $50 and expiring in six months is trading at $14. A European put option on the stock with the same strike price and expiration as the call option is trading at $2. The current stock price is $60 and a $1 dividend is expected in three months. Zero coupon risk-free bonds with face value of $100 and maturing after 3 months and 6 months are trading at $99...
A European call option on a stock with a strike price of $75 and expiring in...
A European call option on a stock with a strike price of $75 and expiring in six months is trading at $5. A European put option on the stock with the same strike price and expiration as the call option is trading at $15. The current stock price is $64 and a $2 dividend is expected in three months. Zero coupon risk‐free bonds with face value of $100 and maturing after 3 months and 6 months are trading at $99...
A European put option on Tata Steel stock at the strike price of Rs.440 with expiry...
A European put option on Tata Steel stock at the strike price of Rs.440 with expiry of three months, is Rs. 30 with risk-free interest rate of 7% per annum and the current price of stock is Rs. 435. Identify the arbitrage opportunities open to a trader if the put price is Rs. 40 or 20.
The price of a non-dividend paying stock is $45 and the price of a six-month European...
The price of a non-dividend paying stock is $45 and the price of a six-month European call option on the stock with a strike price of $46 is $1. The risk-free interest rate is 6% per annum. The price of a six-month European put option is $2. Both put and call have the same strike price. Is there an arbitrage opportunity? If yes, what are your actions now and in six months? What is the net profit in six months?
A European call option on a non-dividend-payment stock with a strike price of $18 and an...
A European call option on a non-dividend-payment stock with a strike price of $18 and an expiration date in one year costs $3. The stock price is $20 and the risk free rate is 10% per annum.Can u design an arbitrage scheme to expolit this situation?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT