You observe the price of a European put option that expires in nine months and has a strike price of $45 is $3. The underlying stock price is $49.50. The term structure is flat, with all risk-free interest rates being 8%. a. What is the price of a European call option that expires in nine months and has a strike price of $45? b. You observe next that the price of the call option (in part (a)) in the market is $9.59. State why an arbitrage opportunity exists and explain how you would take advantage of this opportunity. (Hint: answer should include an outline general strategy, net cost of strategy at initiation and net profit at expiration using the numbers in the question)
You observe the price of a European put option that expires in nine months and has a strike price of $45 is $3. The underlying stock price is $49.50. The term structure is flat, with all risk-free interest rates being 8%. a. What is the price of a European call option that expires in nine months and has a strike price of $45? b. You observe next that the price of the call option (in part (a)) in the market is $9.59. State why an arbitrage opportunity exists and explain how you would take advantage of this opportunity. (Hint: answer should include an outline general strategy, net cost of strategy at initiation and net profit at expiration using the numbers in the question)
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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You observe the price of a European put option that expires in nine months and has a strike price of
$45 is $3. The underlying stock price is $49.50. The term structure is flat, with all risk-free interest
rates being 8%.
a. What is the price of a European call option that expires in nine months and has a strike price
of $45?
b. You observe next that the price of the call option (in part (a)) in the market is $9.59. State
why an arbitrage opportunity exists and explain how you would take advantage of this
opportunity. (Hint: answer should include an outline general strategy, net cost of
strategy at initiation and net profit at expiration using the numbers in the question)
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