Kevin is analyzing the common stock of BRC, a soft drink manufacturer. BRC stock currently trades at
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Question:
Kevin is analyzing the common stock of BRC, a soft drink manufacturer. BRC stock currently trades at $30 per share. The stock pays no dividends. Surprisingly, a three-month BRC European call option with an exercise price of $27 sells for $2. The market interest rate is 4% per annum. Assume that there are no transaction costs.
(a) Explain why there is an arbitrage opportunity.
(b) Explain the process of the arbitrage transactions now and in three months.
Related Book For
Macroeconomics Principles and Applications
ISBN: 978-1133265238
5th edition
Authors: Robert e. hall, marc Lieberman
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