Question
An American put on a non-dividend paying stock is currently worth Rs200. The put expires in a month's time and has a strike price of
An American put on a non-dividend paying stock is currently worth Rs200. The put expires
in a month's time and has a strike price of Rs500. The stock is currently worth Rs270.
(a) Do these prices allow arbitrage? Explain. If they do permit arbitrage, explain the
arbitrage transactions and determine the arbitrage profit that can be made.
(b) Can you repeat the same strategy if a one-month European put on the same stock
with a strike price of Rs500 is currently priced at Rs200? Explain your answer.
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
Concise 6th Edition
324664559, 978-0324664553
