Question
The spot price of corn is 301.40 cents per bushel. The three-month futures price on corn is 316.2 cents per bushel. The two-month call option
The spot price of corn is 301.40 cents per bushel. The three-month futures price on corn is 316.2 cents per bushel. The two-month call option on this corn futures with an exercise price of 330 cents per bushel is priced at $3.50. The two-month put option on this corn futures with an exercise price of 330 cents per bushel is priced at $12.70. The continuously compounded risk-free rate is 2.3%. Construct a risk-free arbitrage strategy with positive cash flow at time 0 and zero cash flow at the option expiration time T. Show the time 0 and time T cash flows in two separate tables.
Given,
Spot price (S) = 301.40 cents = $3.014
Call price (c) = $3.5
Exercise price (K) = 330 cents = $3.3
Put price = $12.7
Risk free rate = 2.3% continuously compounded
Time = 2 months
C-P=Fo (t-) - X)* (1+r) ^-t
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