Question
Dog has ingeniously programmed an algorithm to take advantage of violations in the put-call parity relationship for (MFS). The current MFS stock price is $112.
Dog has ingeniously programmed an algorithm to take advantage of violations in the put-call parity relationship for (MFS). The current MFS stock price is $112. The risk-free rate is 5% annually. The price of a call on the stock with strike price of $105 is $12, with the call expiring in 1 year. The put price with strike of $105 (also expiring in 1 year) is $5.
The program correctly detects a violation in the put-call parity relationship. If executed correctly, how much profit (in dollars) can Dog earn via a put-call parity based arbitrage strategy? Use discrete (i.e., not continuous) compounding for present value discounting.
answer is (5)
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