Question
Shares in XYZ Corporation sell today for $20. The risk-free rate is 3% (continuously compounded). In the next six months, XYZ shares will either increase
Shares in XYZ Corporation sell today for $20. The risk-free rate is 3% (continuously compounded). In the next six months, XYZ shares will either increase in price by 30%, or decrease by 40%.
(1) What is the price of a European call with strike price $19 and expiration in six months?
(2) What is the price of a European put with strike price $19 and expiration in six months?
(3) If the put from point (2) currently trades for $1, is there an arbitrage? If so, describe one. If not, why?
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Financial Performance
Authors: Marc Bertoneche, Rory Knight
1st Edition
0750640111, 978-0750640114
