Ninzatols Case Ninzatols’ stock is currently priced at $35, while a European-sty

Question

Ninzatols Case
Ninzatols’ stock is currently priced at $35, while a European-style put option with a strike price of $36 is trading at $4.31 and a European-style call option with the same strike price is trading at $4.15. Both options have 6 months remaining until expiration. The risk-free rate is currently 4 percent.

Ninzatol Case: In the case of the options on Ninzatols’ stock, by establishing a long protective put position, one could:

not earn an arbitrage profit because he should short the protective put position.

earn an arbitrage profit of $0.48 per share when simultaneously purchasing the call and borrowing the remaining funds needed for the position at the risk-free rate.

earn an arbitrage profit of $0.14 per share when simultaneously selling the call and borrowing the remaining funds needed for the position at the risk-free rate.

earn an arbitrage profit of $0.14 per share when simultaneously selling the call and lending at the risk-free rate.

not earn an arbitrage profit because he should short the protective put position.

earn an arbitrage profit of $0.48 per share when simultaneously purchasing the call and borrowing the remaining funds needed for the position at the risk-free rate.

earn an arbitrage profit of $0.14 per share when simultaneously selling the call and borrowing the remaining funds needed for the position at the risk-free rate.

earn an arbitrage profit of $0.14 per share when simultaneously selling the call and lending at the risk-free rate.

Explanation / Answer

Put call parity

S+P=C+Xe^(-rt)

LHS=35+4.31=39.30

RHS=4.15+36*e^(-4%*0.5)=39.44

Arbitrage profit=39.44-39.30=0.14 per share

Sell call and borrow at risk free rate

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