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Q3. You notice the following quotes for the FBM KLCI and the index options: FBM KLCI = 840 points 850 call = 8 points 850

Q3. You notice the following quotes for the FBM KLCI and the index options:

FBM KLCI = 840 points

850 call = 8 points

850 put = 3 points

Assume you can long/short the spot index, the risk-free rate of 6% per year and 90-day maturity for the options:

  1. Determine using the put-call parity, the nature of mispricing.
  2. Outline the arbitrage strategy and determine the arbitrage profit if you transacted in one contract equivalent.
  3. Graph your arbitrage strategy and the overall position.
  4. Show that your arbitrage strategy is indeed riskless.

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