Question
The current price of Stock X is $60 a share. A call option on Stock X sells for $1 while a put option sells for
The current price of Stock X is $60 a share. A call option on Stock X sells for $1 while a put option sells for $2. Both options have an exercise price of $64 and expire in one year. The relevant risk-free rate is 2% (per year). Stock X is not expected to pay any dividends over the next one year.
a) Use the put-call parity to suggest an arbitrage strategy to earn risk-free profits. Specifically, describe the various short and long positions you need to take in the underlying assets and show all the relevant cash flows from this strategy at both origination and expiration. Use a table to show all of your work. [Note: Long = Buy; Short = Sell]
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