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

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Finance

1-month call and put price for European options at strike 108 are 0.29 and 1.70, respectively. The prevailing short-term interest rate is 2% per year.

  1. Find the current price of the stock using the put-call parity.
  2. Suppose another set of call and put options on the same stock at the strike price of 106.5 is selling for 0.71 and 0.23, respectively. Is there any arbitrage opportunity at 106.5 strike price? Answer this by finding the amount of arbitrage profit available at the strike price of 106.5. (Hint: Use the price found in 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 arbitrage opportunity.)
  3. What would be the strategy to take advantage of arbitrage opportunity at 106.5, if there is any? (Hint: State whether you would have to be long/short in all the 4 instruments (put, call, stock, bond) that are used in the put-call parity)

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