1) What is the lower bound for the price of a call option that has 4 months...
Question:
1) What is the lower bound for the price of a call option that has 4 months until expiration when the stock price is $35, the strike price is $33 and the interest rate is 9%? (Assume no dividends).
2) A one-month put option, with a strike of 45, on a non-dividend stock is selling for $2. The stock's current price is $41 and the risk-free interest rate is 5%. Is there an arbitrage and, if so, map out the strategy and sketch the arbitrage payoff diagram.
3) A call and put option both have a strike of $30 and an expiration date of 5 months. They both sell for $4. The underlying stock price is $28. The interest rate is 7%. Identify the arbitrage and map out the strategy including the arbitrage profit.
Financial Management Theory and Practice
ISBN: 978-1305632295
15th edition
Authors: Eugene F. Brigham, Michael C. Ehrhardt