Put-call parity asserts that the sum of the prices of the stock and put must equal the
Question:
Put-call parity asserts that the sum of the prices of the stock and put must equal the prices of the call and the bond. If they do not, an arbitrage opportunity exists and you can generate a risk-free return. Given the following information,
Price of the stock ................................................................$50.00
Interest rate ....................................................................... 5%
Price of a $50 bond discounted at the current interest rate ................$47.62
Price of a call to buy the stock at $50 ........................................ $4.38
Price of a put to sell the stock at $50 ......................................... $4.00
an arbitrage opportunity exists. Unfortunately, you construct the wrong positions (do everything backwards). Verify that you always lose at the following prices of the stock: $40, $45, $50, $55, and $60.
Step by Step Answer:
In this problem the investor incorrectly executes the arb...View the full answer
