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(a) The arbitrage strategy is to short present value of strike. call, long (b) An immediate arbitrage profit is approximately $ 0.494 put, buy share, short bonds to borrow the

(a) The arbitrage strategy is to short present value of strike. call, long (b) An immediate arbitrage profit is approximately $ 0.494 put, buy share, short bonds to borrow the

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ab. 130.

Details of the prices of share, derivatives and interest rates are as follows: . ABC's share price is $22.50 at time 0. • The European options on ABC have a common strike price K-$20 and mature in T-6 months. Today's put price is $1.50. • The continuously compounded risk-free interest rate is 5% per annum. • No dividends are paid on ABC's share over the option's life. Suppose you find that an errant trader quotes a call price of $4. Use this information to help answer the questions that follow. (a) The arbitrage strategy is to short present value of strike. (b) An immediate arbitrage profit is approximately $ 0.494 ✓call, long put, buy share, short bonds to borrow the
Transcribed Image Text:Details of the prices of share, derivatives and interest rates are as follows: . ABC's share price is $22.50 at time 0. • The European options on ABC have a common strike price K-$20 and mature in T-6 months. Today's put price is $1.50. • The continuously compounded risk-free interest rate is 5% per annum. • No dividends are paid on ABC's share over the option's life. Suppose you find that an errant trader quotes a call price of $4. Use this information to help answer the questions that follow. (a) The arbitrage strategy is to short present value of strike. (b) An immediate arbitrage profit is approximately $ 0.494 ✓call, long put, buy share, short bonds to borrow the
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