A four-month call option with $60 strike price is currently selling at $5. The underlying stock price is $59. The risk-free rate is 12% p.a. The put with same maturity and strike price is selling at $3.5. Can an arbitrageur make riskless profit? If ‘YES’ what strategies an arbitrageur should take to make this profit?

If your answer above is ‘YES’, calculate the arbitrage profit by completing the following table showing strategy (i.e., whether buying or selling put/call portfolio); position, immediate cash flows and cash flows at expiry (i.e., in 4 months)

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Strategy Position Immediate Cash flow in 4 cash flows months ST< ST S60 $60 Total Strategy Position Immediate Cash flow in 4 cash flows months ST< ST S60 $60 Total

Answer rating: 100% (QA)

Strike Price 60Rf Rate 12 paMaturity 4 monthsCall Option Premium 5Put Option Premium 35Cur... View the full answer