Question 2 Financial Options [7points]

Part A

Consider the following securities and market prices:

Security	Maturity (Years)	Strike Price	Price (Today)
Apple Stock	-	-	$95
Put on Apple Stock	1	$90	$10
Call on Apple Stock	1	$90	?

a) What should be the price of the call option? (Hint: be careful to use continuous compounding).

b) Assume that the call option on Apple with strike price $90 and maturity in one year is currently trading at $17. You immediately tell your broker that you found a different price in part (a), but he replies that you must be wrong: markets should be efficient and the price you computed in point (1) is useless. Do you agree with him or not? Construct an arbitrage portfolio to support your answer.

c) Assume now that there is a fee of 8 cents per trade for every option or stock you buy or sell. Would your answer to part (b) change?