1 Question A

A 1-year European call option with strike K = $1000 costs c = $200 and a 1-year

European put option, on the same stock and which has the same strike, costs p = $100.

The underlying stock costs S = $700. The continuously compounded risk-free rate and

dividend yield are r = 6% and q = 0% per annum, respectively. Consider the strategy of

buying the stock, selling the call, and buying the put.

REQUIRED

1. What is the rate of return on this position held until the expiration of both options?

Please put your nal answer and any brief narrative explaining your ndings in the

box below

2.

Identify and detail the arbitrage which is implied by your answer to 1. Please put

your nal answer and any brief narrative explaining your ndings in the box below

and, if you need more space, please continue in the free space provided at the end

of this paper:

3. What dierence between the call and put prices would eliminate arbitrage? Please

put your nal answer and any brief narrative explaining your ndings in the box

below

4. In about 5 sentences explain how you would use options for speculation as opposed

to shares of stock. Please put your narrative in the box below

the top two questions have been previously answered, but sub part 3&4 have not. They are linked questions