The market price of a 1000-share European put option contract is $6200. The expiration date of the put option is one year from today. On that date, the price of the underlying stock will be either $50 or $32. The two states are equally likely to occur. Currently, the stock sells for $40; its strike price is $42. Suppose you are able to borrow money at 10% annual rate. Is there an arbitrage chance? How can you earn risk-free profit?
The market price of a 1000-share European put option contract is $6200. The expiration date of the put option is one year from today. On that date, the price of the underlying stock will be either $50 or $32. The two states are equally likely to occur. Currently, the stock sells for $40; its strike price is $42. Suppose you are able to borrow money at 10% annual rate. Is there an arbitrage chance? How can you earn risk-free profit?
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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The market price of a 1000-share European put option contract is $6200. The expiration date of the put option is one year from today. On that date, the price of the underlying stock will be either $50 or $32. The two states are equally likely to occur. Currently, the stock sells for $40; its strike price is $42. Suppose you are able to borrow money at 10% annual rate. Is there an arbitrage chance? How can you earn risk-free profit?
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