Suppose that: A stock is currently trading at $90. - It has announced that it...

Transcribed Image Text:

Suppose that: • A stock is currently trading at $90. - It has announced that it will pay a $1 dividend in two months. • Zero-coupon bonds with one, two, and three months to maturity and $100 face values are trading at 99.50, 99.00, and 98.50, respectively. You see European options with one and three months to maturity trading at the following prices: Strikes 80 90 100 110 120 130 Options with one month to expiration Calls Puts 11.74 5.39 1.96 11.46 0.58 20.03 29.78 39.38 Options with three months to expiration Calls Puts 14.42 9.02 5.73 3.01 14.23 22.35 30.82 39.90 In each case (the one-month series and the three month series), 1) identify an arbitrage opportunity, and 2) state exactly what trading strategy you would use to exploit it. (a) Case I: arbitrage the one-month options. . That is find and explicitly describe the arbitrage, how you exploit it, and how much money you make. (b) Case II: arbitrage the three-month options. Suppose that: • A stock is currently trading at $90. - It has announced that it will pay a $1 dividend in two months. • Zero-coupon bonds with one, two, and three months to maturity and $100 face values are trading at 99.50, 99.00, and 98.50, respectively. You see European options with one and three months to maturity trading at the following prices: Strikes 80 90 100 110 120 130 Options with one month to expiration Calls Puts 11.74 5.39 1.96 11.46 0.58 20.03 29.78 39.38 Options with three months to expiration Calls Puts 14.42 9.02 5.73 3.01 14.23 22.35 30.82 39.90 In each case (the one-month series and the three month series), 1) identify an arbitrage opportunity, and 2) state exactly what trading strategy you would use to exploit it. (a) Case I: arbitrage the one-month options. . That is find and explicitly describe the arbitrage, how you exploit it, and how much money you make. (b) Case II: arbitrage the three-month options.

Answer rating: 100% (QA)

a Case 1 Onemonth options The arbitrage opportunity is in the 130 strike put It is trading for 3938 ... View the full answer