The stock of Delta, Inc. is selling now for $40. A year from today it will sell for either $30 or $120. The risk-free interest rate is 4%, and a call option on Delta, Inc. with an exercise price of $50 is available.

What is the fair (i.e. arbitrage-free) value of the call?

The call is selling at $10. Show that you can create an arbitrage position to take advantage of the difference between the price of the call and its arbitrage-free value.

Research the information on StockTrak about shares of Apple and options on them. Pick a put option and call option with the same strike (exercise) price, which is "close to the money," that is, options with a strike (exercise) price close to the current stock price. Use put/call parity to calculate the fair value of the put option. (Assume that the annual risk-free rate is 1.5%).

Is the actual price of the put option equal to its fair value according to the put/call parity? What can explain deviations of the actual price from the fair value?

Answer rating: 100% (QA)

The fair value of the call is the present value of the payoffs from the call option The payoff from the call option is the difference between the stoc... View the full answer