OXCO is a non-dividend paying stock currently trading at $10. Risk free interest rates are 8% p.a., continuously compounded. The following table provides information on four European options written on OXCO stock that have three months to expiration. 

a) Test for violation of the upper and lower bounds on the option prices and the put-call parity condition.

 

b) Show algebraically that the maintenance of put-call parity for each pair of call and put options precludes the possibility of a box spread arbitrage opportunity.

Transcribed Image Text:

Option Call Put Call Put Exercise price $9.00 $9.00 $11.00 $11.00 Option price $1.310 $0.105 $0.308 $1.153 Option Call Put Call Put Exercise price $9.00 $9.00 $11.00 $11.00 Option price $1.310 $0.105 $0.308 $1.153

Answer rating: 100% (QA)

Solution a Test for violation of the upper and lower bounds on the option prices and the putcall parity condition The upper bound on the option price ... View the full answer