If the current stock price is £40 and the exercise price is £36, the risk-free interest rate is 12% per annum. The price of a 3-month European call option is £10 and the price of 3-month European put option is £4. Assuming that the underlying stock doesn't pay dividends within the 3 months.

What opportunities are there for an arbitrageur? Explain the investment principles justifying your arbitraging strategy.

Answer rating: 100% (QA)

There is an opportunity for an arbitrageur to make a riskfree profit by exploiting the mispricing of ... View the full answer