Question 13 A 4-month European call option on a dividend paying share has strike R60, and price R5. The current share price is R64, and a dividend of R0.80 is expected in 1 month. The risk-free interest rate is 12% per annum for all maturities. What arbitrage opportunities are there? Question 14 [9] Consider the European put and call options both with a strike price of R45 expiring in 115 days. The underlying stock is priced at R48 and makes no cash payments during the life of the options. The risk-free rate is 4.5% per annum, continuously compounded. Assume that the put option is selling for R3.75, and the call option is selling for R8.00. 14.1 Identify the mispricing by comparing the price of the actual put option with the price of the synthetic put option. (Hint: Use the put-call parity relation.) [3] 14.2 Show how an arbitrageur could take an advantage of the mispricing. [6] Question 13 A 4-month European call option on a dividend paying share has strike R60, and price R5. The current share price is R64, and a dividend of R0.80 is expected in 1 month. The risk-free interest rate is 12% per annum for all maturities. What arbitrage opportunities are there? Question 14 [9] Consider the European put and call options both with a strike price of R45 expiring in 115 days. The underlying stock is priced at R48 and makes no cash payments during the life of the options. The risk-free rate is 4.5% per annum, continuously compounded. Assume that the put option is selling for R3.75, and the call option is selling for R8.00. 14.1 Identify the mispricing by comparing the price of the actual put option with the price of the synthetic put option. (Hint: Use the put-call parity relation.) [3] 14.2 Show how an arbitrageur could take an advantage of the mispricing. [6]