Question
XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with the same strike of $24
XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with the same strike of $24 and maturity of 18 months. Information regarding these two options is as follows:
Call options trading at $3.32. You calculate the fair price of this call option is $3.68.
Put options trading at $3.20. You calculate the fair price of this put option is $2.94.
The risk-free rate is 5% compounded continuously.
Prove that an arbitrage opportunity exists using put and call parity.
Describe a trading strategy to exploit the above arbitrage opportunity. The table below may be useful. Strategy Cost PAYOFF ST > X ST < X
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To prove that an arbitrage opportunity exists using put and call parity we can compare the cost of constructing a synthetic call option and a synthetic put option with the actual prices of the call an...
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Step: 2
Step: 3
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Financial Reporting And Analysis
Authors: Lawrence Revsine, Daniel Collins, Bruce Johnson, Fred Mittelstaedt, Leonard Soffer
8th Edition
1260247848, 978-1260247848
