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Question 4 The FBM KLCI and index options possess the following values : FBM KLCI = 730 points 740 call = 7 points 740 put
Question 4
The FBM KLCI and index options possess the following values :
FBM KLCI = 730 points
740 call = 7 points
740 put = 2 points
The spot index can be traded. The risk-free rate is 5% per annum. The options expire in 60 days.
Required:
- Prove that there is mispricing. (2 marks)
- Propose a suitable arbitrage strategy and calculate the arbitrage profit. (2 mark)
- Draw a graph of arbitrage strategy and the relevant positions. (2 marks
- Prove that this arbitrage is riskless. (2 marks)
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