You are given the following information: (i) The current price of stock Y is 30. (ii) Dividends
Question:
You are given the following information:
(i) The current price of stock Y is 30.
(ii) Dividends of 1 per unit of stock will be paid in two months and in eight months.
(iii) The continuously compounded risk-free interest rate is 6%.
(iv) The price of a 1-year 32-strike European call option on stock Y is 3.
(v) The price of a 1-year 32-strike European put option on stock Y is 4.
Describe how you could earn arbitrage profits with actions taken at time 0 only.
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ANSWER Arbitrage opportunities arise when there is a chance to make riskfree profits by exploiting p...View the full answer
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