Question
Question 1 (10 Marks) XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with the
Question 1 (10 Marks)
XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with the same strike of $24 and maturity of 18 months. Information regarding these two options is as follows:
Call options trading at $3.32. You calculate the fair price of this call option is $3.68.
Put options trading at $3.20. You calculate the fair price of this put option is $2.94.
The risk-free rate is 5% compounded continuously.
Prove that an arbitrage opportunity exists using put and call parity. (5 Marks)
Describe a trading strategy to exploit the above arbitrage opportunity. The table below may be useful. (5 Marks)
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Strategy |
Cost | PAYOFF | |
| ST > X | ST < X | ||
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