Question: Given the underlying stock price S = 2 0 today, its price has a 9 0 % possibility to be S = 1 8 and

Given the underlying stock price S =20 today, its price has a 90% possibility to be S =18 and a 10% possibility to be S =22 in three month. Thus, based on the the non- arbitrage pricing principal, the fair price of a call option expiring in three month at strike price K =21 is 0.633 with the annual risk free interest rate r =12%(See details in the lecture notes). If the current market price of the call falls to 0.5, does there exist an arbitrage opportunity? If yes, construct a strategy to do the arbitrage and explain it.

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Q:

Rewrite these sentences to reflect your audience's viewpoint. a. Your e-mail order cannot be processed; we request that you use the order form on our website instead. b. We insist that you always...

Q:

1. (10 marks) Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage...

Q:

1. (10 marks) Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage...

Q:

(10 marks) Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage pricing...

Q:

Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage pricing principal,...

Q:

1. (10 marks) Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage...

Q:

Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S = 22 in three month. Thus, based on the the non- arbitrage pricing principal,...

Q:

Please only answer if you give a constructed arbitrage strategy 1. (10 marks) Given the underlying stock price S = 20 today, its price has a 90% possibility to be S = 18 and a 10% possibility to be S...

Q:

1. (10 marks) Given the underlying stock price S : 20 today, its price has a 90% possibility to be S : 18 and a 10% possibility to be S : 22 in three month. Thus, based on the the non- arbitrage...

Q:

Please provide your strategy for the arbitrage and explain it briefly 1. (10 marks) Given the underlying stock price S : 20 today, its price has a 90% possibility to be S : 18 and a 10% possibility...

Q:

Question 28 3 pts Given an underlying stock price of $20, an exercise price of $20, a time to expiration of 3 months , a risk free rate of 12% and a underlying stock return variance of 16% compute...

Q:

Use the Kruskal-Wallis test to determine whether there is a significant difference in the following groups. Use a =.05. Group 9 21 29 22 37 42 Group 2 30 38 35 24 29 Group 3 39 32 41 44 30 27 33

Q:

Why did Israel fail to anticipate the attacks by Egypt and Syria on October 6, 1973?

Q:

Determine whether the following functions are even, odd o r neither. Justify your answer i n each case. a . , g ( t ) = c o s ( t ) + s i n ( t ) ( 3 Marks ) b . , g ( x ) = x 4 + 1 x 3 - 2 x

Q:

Presented below are two independent situations: (a) On January 1, 2020, Teal Mountain Inc bought land that had an assessed value of $390,000 at the time of purchase. A $610,000 zero-interest-bearing...

Q:

Calculate the amount of ammonium in grams that is required per electron equivalent of dichloromethane (CH2Cl2) in wastewater when subjected to aerobic biological treatment if fs = 0.35. Assume there...

Q:

(iv) The Ksp for zinc oxide is 3.5 x 1017. What concentration of zinc sulfate (in mol/L) must be dissolved in water in contact with solid zinc oxide to obtain a solution pH of 5.9?.

Q:

You are equipped with necessary skills and knowledge to see the interplay between culture, society, and politics. These skills can be used to see how Anthropology, Sociology, and Politics operate in...

Q:

Give 5 activities at home that requires the following energy system: ATP-CP 1. 2. 3. 4. 5. Glycolytic 1. 2. 3. 4. 5 Oxidative 1. 2. 3. 4. 5

Q:

Purchased 5 wet suits and 5 Mask/Flipper/Snorkel sets from Cousteau Underwater Inc. The wet suits cost $220 each and the MFS sets cost $12 each

Q:

=+2. Show the benefits up front. No one wants to wade through miles of copy to find out what's in it for them? (Notice them should have been him or her. But, them is more conversational.) People want...

Q:

=+ You will know this if you have insight into your brand's personality and your consumer's core (or key) values.

Q:

=+ Actually make them stop what they're doing at that precise moment in time and hear what you're saying. Keep working until you find an interruptive or disruptive message. For example, this message...