Consider a stock that is worth $50. A European put and a European call on this stock have an exercise strike price of $50 and expire in one year. The call costs $5 and the put costs $4. A risk-free bond will pay $50 in one year and costs $45. Is there an arbitrage opportunity? If so, state what transactions you would make and the present value of how much profit you would earn at expiration.
Consider a stock that is worth $50. A European put and a European call on this stock have an exercise strike price of $50 and expire in one year. The call costs $5 and the put costs $4. A risk-free bond will pay $50 in one year and costs $45. Is there an arbitrage opportunity? If so, state what transactions you would make and the present value of how much profit you would earn at expiration.
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
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Consider a stock that is worth $50. A European put and a European call on this stock have an exercise strike price of $50 and expire in one year. The call costs $5 and the put costs $4. A risk-free bond will pay $50 in one year and costs $45. Is there an arbitrage opportunity? If so, state what transactions you would make and the present value of how much profit you would earn at expiration.
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