The following data relate to a listed company.

• Current share price = $160

• Exercise price = $190

• Maturity = 6 months

• Risk free rate of return = 5% per annum

• Dividend yield = 3% per annum

• Standard deviation of share returns =40%

i. Using the above data, estimate the value of a call option

ii. Using the calculated call option price and other relevant data, estimate the price of a put option using the put-call parity relationship.

iii. If the market value of the put option is $1 less than the value of the put option estimated in ii above, explain if there are any arbitrage opportunities. If there are arbitrage opportunities, explain the strategy you would follow to profit from it. Show detailed calculations to justify your answer.

Answer rating: 100% (QA)

i To estimate the value of a call option we can use the BlackScholes option pricing model The formula for calculating the value of a European call opt... View the full answer