Mr. John Barker, who is a market maker at CBOE, notices the following quotes in his hand-held
Question:
Mr. John Barker, who is a market maker at CBOE, notices the following quotes in his hand-held device. The price of Macrohard stock is $66 per share. The European call option on the stock, with strike price $70 and expiration date in six months, is quoted for $4 per share. The European put option on the same stock, with the same strike price and the same expiration date, is quoted for $5.5 per share. A dividend of 50 cents is expected in two months. The interest rate is 5%.
(a) Is there an arbitrage opportunity to Mr. John Barker? How much is the arbitrage profit per share of the stock?
(b) Describe your arbitrage strategy in words and then use a table to show the cash flows of your arbitrage strategy
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston