Sample Question:

Please show working so I can follow the steps:

A 1 year call option with a strike price of $7 is selling for $1.75. The stock price is currently $6.

a. What is the price of the corresponding put having the same expiry and exercise price? The present value of the exercise price is $4.

b. The put is currently selling at $0.30. Is the put over- or under-priced?

c. What steps would you take to make an arbitrage profit? (Don't need calculations for part C - just explain please!)