Consider a put and call option on Company A stock at strike price K. Suppose further that the put premium is greater than call premium, both options expire in 1-year and the 1-year effective interest rate is r.

If call premium - put premium + PV(strike) > PV(forward price), explain how this leads to an arbitrage opportunity.

Answer rating: 100% (QA)

1 Put call parity equation C X 1r t S 0 P Where C Call premium P put pr... View the full answer