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The current price of a non-dividend paying share of XYZ company is 500 pence, and its volatility (standard deviation) is 25%. The annualised yield to
The current price of a non-dividend paying share of XYZ company is 500 pence, and its volatility (standard deviation) is 25%. The annualised yield to maturity of a 6-months zero-coupon Treasury bond is 5% (i.e., the annual risk-free rate for 6 month deposits is 5%). Answer the following: i) Calculate a fair price for a call option with exercise price of 480 pence and time to maturity of 6 months. ii) If the call option mentioned in part i) is actually trading for 45 pence in the derivatives market, describe in detail an appropriate risk-less arbitrage strategy that takes advantage of the mispricing. iii) Using the put-call parity calculate a fair price for a put option with the same exercise price and time to maturity as the call option mentioned in part i). iv) If the put option in part iii) is actually trading for 20 pence in the derivatives market, describe in detail a risk-less arbitrage strategy, involving shares, calls and treasury bills, that takes advantage of the mispricing. The current price of a non-dividend paying share of XYZ company is 500 pence, and its volatility (standard deviation) is 25%. The annualised yield to maturity of a 6-months zero-coupon Treasury bond is 5% (i.e., the annual risk-free rate for 6 month deposits is 5%). Answer the following: i) Calculate a fair price for a call option with exercise price of 480 pence and time to maturity of 6 months. ii) If the call option mentioned in part i) is actually trading for 45 pence in the derivatives market, describe in detail an appropriate risk-less arbitrage strategy that takes advantage of the mispricing. iii) Using the put-call parity calculate a fair price for a put option with the same exercise price and time to maturity as the call option mentioned in part i). iv) If the put option in part iii) is actually trading for 20 pence in the derivatives market, describe in detail a risk-less arbitrage strategy, involving shares, calls and treasury bills, that takes advantage of the mispricing
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