Question
The spot price of a dividend paying stock is $60. The price of an American call option that expires in 15 months is $4.35 with
The spot price of a dividend paying stock is $60. The price of an American call option that expires in 15 months is $4.35 with a strike price of $65. The underlying stock is expected to pay a dividend of $1.50 in 5 months and again $1.50 in 10 months. The term structure is flat and continuously compounded risk-free interest rate is 6% for all maturities.
a. What should be the price of a American put option on the same underlying stock with the same strike price and same maturity?
b. Assume that the American put option described in part (a) is selling for $7.00. Is there any arbitrage opportunity? If yes, then describe the set of transactions that will enable the investor to lock-in the arbitrage profits?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started