Consider a put and a call, both on the same underlying stock that has present pr
ID: 2825964 • Letter: C
Question
Consider a put and a call, both on the same underlying stock that has present price of $32. Both options have the same identical strike price of $26 and time-to-expiration of 200 days. Assume that there are no dividends expected for the coming year on the stock, the options are all European, and the interest rate is 10%. If the put premium is $4.00 and the call premium is $9.00, which portfolio would yield arbitrage profits? Hint: Check your answer with an arbitrage table.
$0.43
$1.37
$1.42
$1.47
$2.32
Explanation / Answer
According to call put theory
9 + 26/1.10200/365 = 4 + 32
RHS = 36
LHS = 33.677
arbitrage opportunity = 36 - 33.677 = 2.32
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.