Consider Commodity Z, which has both exchange-traded futures and option contracts associated with it. As you look
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a. Assuming that the futures price of a six-month contract on Commodity Z is $48, what must be the price of a put with an exercise price of $50 in order to avoid arbitrage across markets? Similarly, calculate the "no arbitrage" price of a call with an exercise price of $45. In both calculations, assume that the yield curve is flat and the annual risk-free rate is 6 percent.
b. What is the "no arbitrage" price differential that should exist between the put and call options having an exercise price of $40? Is this differential satisfied by current market prices? If not, demonstrate an arbitrage trade to take advantage of themispricing.
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Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
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