Question: An options exchange has a number of European call and put options listed for trading on ENCORE stock. You have been paying close attention to

An options exchange has a number of European call and put options listed for trading on ENCORE stock. You have been paying close attention to two call options on ENCORE, one with an exercise price of $52 and the other with an exercise price of $50. The former is currently trading at $4.25 and the latter at $6.50. Both options have a remaining life of six months. The current price of ENCORE stock is $51 and the six-month risk free rate is 3% p.a., continuously compounded.

Required:

How would you exploit this situation to earn arbitrage profits? You should assume the arbitrageur can borrow or lend at the risk free rate, can short sell shares if necessary and does not face any transaction costs.

Step by Step Solution

★★★★★

3.47 Rating (167 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

To exploit the situation and earn arbitrage profits we need to identify any mispricing in the call option prices relative to the principles of arbitra... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

An index currently stands at 1,500. European call and put options with a strike price of 1,400 and time to maturity of six months have market prices of 154.00 and 34.25, respectively. The six-month...

The general merchandise retail industry has a number of segments represented by the following companies: Company Name Merchandise Concept Costco Wholesale Corporation ....... Membership warehouse...

A bank can borrow or lend at LIBOR. Suppose that the six-month rate is 5% and the nine-month rate is 6%. The rate that can be locked in for the period between six months and nine months using an FRA...

Question 4 Options Boundary Conditions (10 marks) An options exchange has a number of European call and put options listed for trading on ENCORE stock. You have been paying close attention to two...

QUESTIONAS [4:30 PM, 2/27/2022] flo: Additional instructions from the student: SUBJECT: BUSINESS ETHICS JOURNAL REVIEW References: any news, articles, issues, research regarding to the subject...

FIN201 Final Exam Sample MULTIPLE CHOICE. 1. Why will banks permit the use of an overdraft as suitable for funding the purchase of inventory that will quickly be converted into cash? A. To assist a...

For the Ball Corporation, perform a Du Pont analysis on the ROE of the company, and discuss significant changes in ROE and the source of the change. UNITED STATES SECURITIES AND EXCHANGE COMMISSION...

wx[ all parts with through explanation on rach question 3. Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to the organizers of the annual jalapeno eating contest. The...

Evaluate the potential gains and losses for forwards,future,call options,put options and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe...

uid pro quo sexual harassment occurs when: a superior threatens to take negative action or to withhold positive action unless the subordinate acquiesces to sexual demands. O an employer uses criteria...

A satellite is in circular orbit 525 km above the surface of Earth. Determine the satellite's speed A satellite is in circular orbit 525 km above the surface of Earth. Determine the satellite's speed

EXHIBITS Income Statement exhibits close all Income Statement CPA Bakers Inc., a calendar year S corporation, is a retailer of gourmet snacks located in Happyville, U.S. CPA Bakers' current year...

ces This problem is based on the transactions for the Eco Build Company in your text. Prepare journal entries for each transaction and identify the financial statement impact of each entry. The...

The marketing department of Graber Corporation has submitted the following sales forecast for the upcoming fiscal year. Budgeted unit sales First Quarter 16,000 Second Quarter 15,000 Third Quarter...

Tom negotiates with Marion for the purchase of three brand new cars which he had seen advertised in the local newspaper for 10,000 each. They are both local car dealers. Consider the legal position...

The YTM on a bond is the interest rate you earn on your investment if interest rates dont change. If you actually sell the bond before it matures, your realized return is known as the holding period...

Given that all the choices are true, which one concludes the paragraph with a precise and detailed description that relates to the main topic of the essay? A. NO CHANGE B. Decades, X-ray C. Decades...

A companys stock is selling for $4. The company has no outstanding debt. Analysts consider the liquidation value of the company to be at least $300,000 and there are 100,000 shares outstanding. What...

Suppose that a stock price is currently $20 and that a call option with an exercise price of $25 is created synthetically using a continually changing position in the stock. Consider the following...

An index currently stands at 696 and has a volatility of 30% per annum. The risk-free rate of interest is 7% per annum and the index provides a dividend yield of 4% per annum. Calculate the value of...

What family and social systems or groups does the character belong to?

Defensiveness and how do they deal with it?

What opportunities are there in the story to have characters faced with