MSFT stock sells at $183 and the 6-month 190-strike put is selling at $14.50. The risk-free rate is 4% and the stock will pay a dividend of $2 in 3 months. We assume that all options are European-style unless specified otherwise.

a) What is the theoretical price of the 6-month 190-strike call?

(b) The 6-month call is selling at $8.45 on the market, show how you can benefit from this arbitrage opportunity. Show all details.

(c) If the options above were American-style, will there still be an arbitrage opportunity?

Answer rating: 100% (QA)

As per Put call parity CX1rt PS where C value of European call option X strike price of the option 1... View the full answer