Goizueta Business School Emory University FIN 424: DERIVATIVE ASSET ANALYSIS Dr. Nicholas Valerio III Fall 2021 Assignment: Arbitrage Restrictions The following table shows prices for exchange-traded options on the same underlying stock; the current stock price is $56.40. Remember: All prices are on a per share basis. Strike Calls Last - Puts Last Price Oct Nov Jan Oct Nov Jan 45 11.45 r 50 7.00 7.25 55 2.50 3.10 14.75 0.60 r 0.25 7.85 0.25 4.60 0.85 0.35 0.75 1.15 2.25 60 0.50 1.00 65 0.15 0.35 2.00 4.00 0.75 6.15 S 8.85 4.25 4.60 An indicates the contract did not trade; an s indicates a contract has not been opened. The contracts expire in 24 days (October), 52 days (November), and 108 days (January). 1. You recently realized some capital gains in the commercial real estate market and have received a check for $5,640 (after taxes). You intend to use this money to pay for a party for your classmates (and professor) at the start of the next semester. In the interim you are considering two strategies for your money: (a) Buy 100 shares of the stock and sell on the third Friday in January (in 108 days), (b) Buy 1 January K=60 call contract (on 100 shares), hold until expiration, and put the remainder of the funds in a 108-day CD with a term rate of 1.25% (i.e. a dollar grows to $1.0125 in 108 days). What is the range of stock prices at expiration which gives (b) a higher dollar return than (a)? Assume the transaction costs for each strategy are zero, and that dividends are zero.