Question
Consider a one-year call option and a one-year put option on the same stock, both with an exercise price $100. If the risk-free rate is
Consider a one-year call option and a one-year put option on the same stock, both with an exercise price $100. If the risk-free rate is 5%, the current stock price is $103, and the put option sells for $7.50.
1. According to the put-call parity, what should be the price of the call option?
2. To your amazement, the call option is actually traded at $15. If the call option fairly priced, overvalued, or undervalued? What would you do to exploit this mispricing? Formulate your strategy and work out the payoff worksheet. What would be your arbitrage profit when the future stock price is equal to $0, $100, and $200?
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