In this problem we consider whether parity is violated by any of the option prices in Table

Question:

In this problem we consider whether parity is violated by any of the option prices in Table 9.1. Suppose that you buy at the ask and sell at the bid, and that your continuously compounded lending rate is 0.3% and your borrowing rate is 0.4%. Ignore transaction costs on the stock, for which the price is $168.89. Assume that IBM is expected to pay a $0.75 dividend on August 8, 2011. Options expire on the third Friday of the expiration month. For each strike and expiration, what is the cost if you:

a. Buy the call, sell the put, short the stock, and lend the present value of the strike price plus dividend (where appropriate)?

b. Sell the call, buy the put, buy the stock, and borrow the present value of the strike price plus dividend (where appropriate)?

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...