1.Identify, if a forward contract is properly priced based on put-call-forward parity. The option exercise price is $90, the risk-free rate is 5 percent, the options and the forward contract expire in two years, the call price is $16.155, the put price is $4.00, and the forward price is $102.43.

2.Consider American call and put options on a debenture bond. The options expire in 55 days. The bond is currently at $1.10 with $1 par value and makes deferred payments over life of the option. The risk-free rate is 6.5 percent. Assume that the contract is at $1 face value bonds. Calculate the lowest and highest possible prices for the calls and puts.

3.Consider the following information on put and call options on a stock: Call price = $6.60

Put price = $8.90 Exercise price = $90

Days to option expiration = 148 Current stock price = $87.42 Risk-free rate = 7 percent

a)Based on put-call parity to calculate prices of the following:

i.Synthetic put option

ii.Synthetic underlying stock

iii.Synthetic call option

iv.Synthetic bond

b)For each of the derivative in Part A, explain if there is any mispricing. If thee is mispricing then illustrate an arbitrage transaction using a synthetic call (two sided).

4.A European call option and put option on a stock both have a strike price of $35 and an expiration date in 4 months. Both selling at $4.5. The risk-free interest rate ranges from 12% to 14% per annum, the current stock price is $34, and a $2.5 dividend is expected in 23 days. Identify the arbitrage opportunity open to a trader in considering both European call option and American call option

Answer rating: 100% (QA)

1 Identifying if a forward contract is properly priced based on putcallforward parity Given Exercise price K 90 Riskfree rate r 5 per annum Time to expiration t 2 years Call price C 16155 Put price P ... View the full answer