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Assume Alpha Ltd is currently trading on the NYSE with a stock price of $65. The...

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Finance

Assume Alpha Ltd is currently trading on the NYSE with a stockprice of $65. The American one-year call option on the stock istrading at $20 with strike price of $65. If the one-year rate ofinterest is 10% p.a. (continuously compounding), is the call pricefree from arbitrage or is it too cheap/expensive, assuming that thestock pays no dividends? What if the stock pays a dividend of $5 inone year?

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We have the following dataCurrent Stock Price 65OneYear Call Option 20Strike Price 65Rate of interest 10 paThe best way to determine whether there is any scenario ofarbitrage or not is to find if there is any benefit involved in thetrade or not We can    See Answer
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Assume Alpha Ltd is currently trading on the NYSE with a stockprice of $65. The American one-year call option on the stock istrading at $20 with strike price of $65. If the one-year rate ofinterest is 10% p.a. (continuously compounding), is the call pricefree from arbitrage or is it too cheap/expensive, assuming that thestock pays no dividends? What if the stock pays a dividend of $5 inone year?

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