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2 Put-call parity [LO 3] You observe the following prices in a situation in which European pul-call parily ought to apply: Put price $1.95 Call

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2 Put-call parity [LO 3] You observe the following prices in a situation in which European pul-call parily ought to apply: Put price $1.95 Call price $1.10 Share price $20.00 Exercise price $22.00 Term to expiry 4 months Risk-free interest rate 1% per month (compound) BUSINESS FINANCE a) Show that pul-coll parity is breached in this case. b) Calculate the payoffs to show that the following strategy is an arbitrage: sell the call, buy the put, buy the shore and borrow the present value of the exercise price for 4 months. Do 31

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