QBV, a non-dividend-paying stock, is currently trading for $100 a share. There is a 25-percent chance that

Question:

QBV, a non-dividend-paying stock, is currently trading for $100 a share. There is a 25-percent chance that the stock will trade for $85 in one year, and a 75-percent chance that the price will increase to $135. The risk-free rate is 5 percent per year. All options expire in one year.
a. If the call option on QBV with a strike price of $115 is actually trading for $10, show that there is an arbitrage opportunity.
b. If the put option on QBV with a strike price of $98 is actually trading for $0.50, show that there is an arbitrage opportunity.

Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Introduction To Corporate Finance

ISBN: 9781118300763

3rd Edition

Authors: Laurence Booth, Sean Cleary

Question Posted: