Question: please check if my answer is correct or not. A non-dividend-paying stock currently sells for $305. The price of a two-year European call option on

please check if my answer is correct or not.

A non-dividend-paying stock currently sells for $305. The price of a two-year European call option on this stock with a strike price of $300 is $30. The risk-free rate is 3% per annum. The price of a European put option with the same expiration and the same strike price as the above call is $5. Is there an arbitrage? If so, find the arbitrage strategy and its cash flows.

Put-call parity:

c0+K*e^-rT=p0+S0

c0+K*e^-rT

=30+300*e^-0.03*2

=312.5293601

p0+S0

=5+305

=310

since c0+K*e^-rT> p0+S0, arbitrage opportunity exists.

Arbitrage strategy:

	0	T
long call	-20	max(ST-300,0)
buy bond that pays K at T	-282.529	300
sell stock	305	-ST
net	2.47064	max(300,ST)

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!

1. Consider a stock whose future price is log-normally distributed. The required rate of return on the stock in the real world is 15% per annum, and its volatility is 20%. The current stock price is...

A non-dividend-paying stock currently sells for $280. A 2-year European call option on the stock with the strike price of $260 sells for $40. The risk-free rate is 2% per annum. If there is no...

Q12 A non-dividend-paying stock currently sells for $280. A 2-year European call option on the stock with the strike price of $260 sells for $40. The risk-free rate is 2% per annum. If there is no...

A company's stock currently sells for $108.13. A one-year European call option on that stock with strike price of $110 sells for $15.02, and the risk free interest rate is 5.01%. The market expects...

A stock currently sells for $31/share. A 3-month European call option on this stock with a strike price of $30/share has a premium of $3/share. A 3-month European put option on the same stock with a...

Arbitrage Using Put and Call A non-dividend-paying stock currently sells for $305. The price of a two-year European call option on this stock with a strike price of $300 is $30. The risk-free rate is...

A companys stock currently sells for $81.16. A one-year European put option on that stock with strike price of $85 sells for $16.24, and the risk free interest rate is 1.6%. The market expects the...

A company's stock currently sells for $131.55. A one-year European put option on that stock with strike price of $140 sells for $22.1, and the risk free interest rate is 1.07%. The market expects the...

please check if my answer is correct or not An investors considers making a bull spread using 1-year European calls on S&P 500 index. The investor sees two European calls; one with the strike price...

24. The distance between Earth and the Sun is 149.6 million km, and the distance between Venus and the Sun is 108.2 million km. How long does it take Venus to orbit once around the Sun? 25. A...

Write resonance structures for tropylium cation sufficient to show the delocalization of the positive charge over all seven carbons.

93 (1 point) Listen Which of the following affects both the supply and demand for bonds? 1) inflation 2) liquidity 3) real return 4) federal budget deficit

Questions Q1. Write a Python program to retrieve the first and last colors from the following list: color_list = ["red", "green", "white", "blue", "black") Q2. Given the following dictionary,...

=+11. She is active in not only a civic group but also in an athletic organization.

=+wants an update on how petroleum prices are affecting customer behavior. Each district manager should be ready with a brief report. After I go through the commission reporting scheme, Ill outline...

=+1. Where was your argument leading to?