Question
Consider a European call option and a European put option. Both are on the same stock, both have a strike price of $67 and an
Consider a European call option and a European put option. Both are on the same stock, both have a strike price of $67 and an expiration date in 6 months. The current price of the call option is $2.12 and the current price of the put is $2.46. The risk-free rate is 5% per annum for all maturities with continuous compounding, and the current stock price is $65. A dividend of $1 per share is expected in 2 months.
(a) Does the put-call parity hold? [2 marks]
(b) If the put-call parity does not hold, describe in detail (step-by-step) the strategy which will lead to an arbitrage profit. How much is this profit per share? [8 marks]
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