Question
[5(a)] A four-month call option with $60 strike price is currently selling at $5. The underlying stock price is $59. The risk-free rate is 12%
[5(a)] A four-month call option with $60 strike price is currently selling at $5. The underlying stock price is $59. The risk-free rate is 12% p.a. The put with same maturity and strike price is selling at $3.5. Can an arbitrageur make riskless profit? If 'YES' what strategies an arbitrageur should take to make this profit? Show your calculation to support your answer
[5(b)] If your answer to 5(a) above is 'YES', calculate the arbitrage profit by completing the following table showing strategy (i.e., whether buying or selling put/call portfolio); position, immediate cash flows and cash flows at expiry (i.e., in 4 months) (6 marks)
Complete the following table (you must show necessary workings below the table)
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