Question
Problem 4: You are a trader who trades both puts and calls on SleazeCo. Information about current market conditions is displayed below. Stock Price Exercise
Problem 4: You are a trader who trades both puts and calls on SleazeCo. Information about current market conditions is displayed below.
Stock Price Exercise Price Expiration Date Call Price Put Price
88 90 1/12th of a year 2.3546 4.6032
88 95 1/12th of a year 1.8978 7.8240
The annualized continuously-compounded risk-free rate is .06 (6%).
1. Given the information above, are there any arbitrage opportunities?
2. If no, explain why. If yes, describe one set of trades you could make now to exploit the arbitrage opportunity. Show that this strategy generates an arbitrage profit.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started