The price of a one-year European call option on a non-dividend-paying stock is $6. The price of a one-year European put option on the same stock is $1. The strike price for both the call and the put is $50. The stock price today is $51 and the continuously compounded risk-free rate is 6% per annum. Use the put-call parity to suggest an arbitrage strategy to earn risk-free profits. Specifically, describe the various short and long positions you need to take in the underlying assets and show all the relevant cash flows from this strategy at both origination and expiration. Use a TABLE to show all of your work.
The price of a one-year European call option on a non-dividend-paying stock is $6. The price of a one-year European put option on the same stock is $1. The strike price for both the call and the put is $50. The stock price today is $51 and the continuously compounded risk-free rate is 6% per annum. Use the put-call parity to suggest an arbitrage strategy to earn risk-free profits. Specifically, describe the various short and long positions you need to take in the underlying assets and show all the relevant cash flows from this strategy at both origination and expiration. Use a TABLE to show all of your work.
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 price of a one-year European call option on a non-dividend-paying stock is $6. The price of a one-year European put option on the same stock is $1. The strike price for both the call and the put is $50. The stock price today is $51 and the continuously compounded risk-free rate is 6% per annum.
Use the put-call parity to suggest an arbitrage strategy to earn risk-free profits. Specifically, describe the various short and long positions you need to take in the underlying assets and show all the relevant cash flows from this strategy at both origination and expiration. Use a TABLE to show all of your work.
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