(7 points) The price of XYZ today is $50. You can borrow or lend at an...
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(7 points) The price of XYZ today is $50. You can borrow or lend at an interest rate of 5% per year. The price of a European put option on XYZ with a strike price of $55 and maturity of 6 months is $7. a) Compute the fair price of a European call option on XYZ with a strike price of $55 and maturity of 6 months. b) Suppose the market price of the call option in part (a) of this question is $5. Construct an arbitrage strategy. What is the arbitrage profit for your strategy? (7 points) The price of XYZ today is $50. You can borrow or lend at an interest rate of 5% per year. The price of a European put option on XYZ with a strike price of $55 and maturity of 6 months is $7. a) Compute the fair price of a European call option on XYZ with a strike price of $55 and maturity of 6 months. b) Suppose the market price of the call option in part (a) of this question is $5. Construct an arbitrage strategy. What is the arbitrage profit for your strategy?
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Here given that Spot price 50 Interest rate 5 Price of put option 7 Strike price 55 Maturity periodm... View the full answer
Related Book For
Microeconomics Theory and Applications
ISBN: 978-1118758878
12th edition
Authors: Edgar K. Browning, Mark A. Zupan
Posted Date:
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