1-month call and put price for European options at strike 108 are 0.29 and 1.70, respectively....

50.1K

Verified Solution

Question

Finance

1-month call and put price for European options at strike 108are 0.29 and 1.70, respectively. The prevailing short-term interestrate is 2% per year.
Find the current price of the stock using the put-callparity.
Suppose another set of call and put options on the same stockat the strike price of 106.5 is selling for 0.71 and 0.23,respectively. Is there any arbitrage opportunity at 106.5 strikeprice? Answer this by finding the amount of arbitrage profitavailable at the strike price of 106.5. (Hint: Use the price foundin part (a) to find the value of both sides of the put-call parity.If the two sides are not equal, then there is some arbitrageopportunity.)
What would be the strategy to take advantage of arbitrageopportunity at 106.5, if there is any? (Hint: State whether youwould have to be long/short in all the 4 instruments (put, call,stock, bond) that are used in the put-call parity)

Answer & Explanation Solved by verified expert

4.3 Ratings (818 Votes)

a Call Premium C 029 and Put Premium P 17 Strike Price K 108 RiskFree Interest Rf 2 Maturity 1 months Let the current price of the stock be S As per putcall parity we have Call Premium See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

1-month call and put price for European options at strike 108are 0.29 and 1.70, respectively. The prevailing short-term interestrate is 2% per year.Find the current price of the stock using the put-callparity.Suppose another set of call and put options on the same stockat the strike price of 106.5 is selling for 0.71 and 0.23,respectively. Is there any arbitrage opportunity at 106.5 strikeprice? Answer this by finding the amount of arbitrage profitavailable at the strike price of 106.5. (Hint: Use the price foundin part (a) to find the value of both sides of the put-call parity.If the two sides are not equal, then there is some arbitrageopportunity.)What would be the strategy to take advantage of arbitrageopportunity at 106.5, if there is any? (Hint: State whether youwould have to be long/short in all the 4 instruments (put, call,stock, bond) that are used in the put-call parity)