ABC's stock price is currently $80 per share. An at-the-money call option (X = $80) on ABC
Question:
ABC's stock price is currently $80 per share. An at-the-money call option (X = $80) on ABC stock currently sells for $8, and an at-the-money put option also sells for $8. The options expire in 3 months, and the risk-free rate of interest is 4 percent per annum. Based on the given prices for the call and put options, does put-call parity hold? If put-call parity does not hold, show the transactions you would engage in to earn an arbitrage profit, and demonstrate that you earn a profit regardless of the price of ABC stock at the expiration of the options. You may assume for simplicity that transactions costs are zero and that you can either borrow or lend at the risk-free rate.
Intermediate Accounting
ISBN: 978-0470161012
9th Canadian Edition, Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield.