Problem

Assuming: S0 = 165.13, X = 165, rc = .0571, T = 102 days, s = 0.21, you observe the current market price for the call is $8.13.

a) How much is the theoretical fair value of the call using BSMbin8e.xls ( Black-Scholes-Merton and Binomial Option Pricing)? Please show a screen from Excel. You Can Ues This URL www.swlearning.com/finance/chance/chance6e/bsbin3.xls

b)Based on your answer in part a, recommend a riskless arbitrage strategy using 1000 calls. You need to specify you need to long or short 1000 calls and how many shares you need to short or long.

c)Show how the option position will offset the loss on the stock in part b if the stock price decreases by $1