5. Stock XYZ is currently trading at $50 and pays no dividends. The price of a...
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5. Stock XYZ is currently trading at $50 and pays no dividends. The price of a European call is $10, and the price of a European put is $12. Both the put and call have a strike price of $60 and will expire in one year. a) What is the implied risk-free interest rate (based on continuous compounding)? b) If the actual risk-free interest rate (based on continuous compounding) is 6%, explain how the trader can profit through arbitrage? c) How much profit would the trader earn? 5. Stock XYZ is currently trading at $50 and pays no dividends. The price of a European call is $10, and the price of a European put is $12. Both the put and call have a strike price of $60 and will expire in one year. a) What is the implied risk-free interest rate (based on continuous compounding)? b) If the actual risk-free interest rate (based on continuous compounding) is 6%, explain how the trader can profit through arbitrage? c) How much profit would the trader earn?
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