Question
a. An investor finds a pair of call and put options (both European) on the same underlying asset have the same exercise price of $45.
a. An investor finds a pair of call and put options (both European) on the same underlying asset have the same exercise price of $45. They are currently priced at $4 with halfyear to expiration. The underlying asset is selling for $43 and the rate of return on a 1-year Treasury bill is 6%. Using put-call parity, illustrates the outcomes of a strategy that involves selling the call and a Treasury bill equal to the present value of $45, buying the put, and buying the underlying asset. (10 marks)
b. You buy a call with an exercise price of $25 for $3 and another call with an exercise price of $35 for $1. Calculate & show the net profit per share if the stock price stands at $34 at expiration. ( 5 marks)
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