A share of Formila Corp. is currently trading at $38.50, and a 1-year call option on Formila
Question:
A share of Formila Corp. is currently trading at $38.50, and a 1-year call option on Formila with X = $40 is trading at $3. The risk-free interest rate is 4.5%.
a. What should be the price of a 1-year put option on the stock with X = $40? Why?
b. If the price of a put is $2, construct an arbitrage strategy.
c. If the price of a put is $4, construct an arbitrage strategy.
Step by Step Answer:
a The price of a 1 year put option on the stock with X 40 should be the same as the price of the 1 y...View the full answer
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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