Practice past paper questions.

1. The price of a European put option is 1.20 euros. The underlying asset has a spot price of 20, and the exercise price of this option is 18. The option expires in three months. The risk-free rate is 1%.

i. What is the price of the call option using the put-call parity? (5mrks)

ii. Which option is in the money, and which is out of the money? (5mrks)

2. The price of a non-dividend paying stock is 10 pounds today. The risk free-rate is 2%. The price of a 6-month future on this stock is 12. Are there any arbitrage opportunities, and if yes, which strategy you would follow to realize riskless profit? (10mrks)