Question
Question 7. Box Spread Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m. on January 14, 2016, these
Question 7. Box Spread
Suncor Energy Inc. (SU) shares are listed on the New York Stock Exchange. At 9:30 a.m. on January 14, 2016, these shares sold for $21.85 per share. The volatility on the returns of Suncor shares is approximately 24%. The following call and put option contracts were available for the months of January, February, and March:
| CALLS | ||
Strike/Expiry | January 22, 2016 | February 19, 2016 | March 18, 2016 |
23 | 0.34 | 0.72 | 0.96 |
24 | 0.13 | 0.41 | 0.69 |
25 | 0.25 | 0.26 | 0.40 |
| PUTS | ||
Strike/Expiry | January 22, 2016 | February 19, 2016 | March 18, 2016 |
23 | 1.28 | 2.01 | 2.14 |
24 | 2.63 | 2.80 | 2.92 |
25 | 3.60 | 3.70 | 3.95 |
Each option contract involves 100 shares. The risk-free rates for these three expiration dates are 0.6%, 1%, and 1.2%. All three rates are continuously compounded.
Given the information on Suncor shares and options above, construct a protective put using the 23-put with February expiration. Hold the protective put position until expiration.
a. Construct a box-spread using the March option contracts with exercise prices of 24 and 25.
b. Construct a profitable riskless arbitrage opportunity using this box-spread, with the requirement of $0 investment today. Calculate the NPV of the riskless profit.
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