Question
Suppose you check the Wall St. Journal online and see Horizon Inc. trading at $51 per share. On the Chicago Mercantile Exchange, calls on Horizon
Suppose you check the Wall St. Journal online and see Horizon Inc. trading at $51 per share. On the Chicago Mercantile Exchange, calls on Horizon with one month to expiration and an exercise price of $46 are trading in the market at $6.00 each. Puts on Horizon with one month to expiration and an exercise price of $55 are trading in the market at $3.00 each.
d) What potential arbitrage opportunities are implied with a put option pricing? Explain how this would be done.
e) Describe briefly how re-pricing of the put options and share price in the market might play out in the markets to close the arbitrage gap? (Ignore transactions costs.)
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