Question: Suppose that you confront the following data for a certain non-dividend-paying stock: Stock Price $110 Call Price (6-month maturity, X=$105) $15 Put price (6-month maturity,

Suppose that you confront the following data for a certain non-dividend-paying stock:

Stock Price $110

Call Price (6-month maturity, X=$105) $15

Put price (6-month maturity, X=$105) $5

Risk-free interest rate 16% per year

a) Use these data in the put-call parity theorem to check if parity is violated.

b) Show how to exploit any mispricing by examining the immediate cash flow and cash flow in 6 months.

Step by Step Solution

★★★★★

3.57 Rating (157 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock

a Putcall parity theorem states that for European options Call Price Put Price Stock Price Present V... View full answer

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!

Q:

13. What is a lower bound for the price of 3-month call option on a non- dividend-paying stock when the stock price is $50, the strike price is $45, and the 3-month risk-free interest rate is 8%?...

Q:

Last Sale Net Bid Ask Open Int Puts Last Sale Net bid Ask Vol Open Int 16Aug 155.00(1619H155-E) 6.45 0.75 6.95 7.25 9 16Aug 155.00(1619T155-E) 1.18 (0.75) 1.17 1.25 61 4505 16Aug 166.00(1619H160-E)...

Q:

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

Q:

Question 15 Suppose you observe the following data for a certain stock. Current stock price $110 Call price (six-month maturity, X-$105) $14 Put price (six-month maturity, X=$105) Risk-free interest...

Q:

1. A four-month European put option on a non-dividend-paying stock is currently selling for $2. The stock price is $45, the strike price is $50, and the risk-free interest rate is 12% per annum. Is...

Q:

Evaluate the potential gains and losses for forwards,future,call options,put options and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe...

Q:

Using the options data from the spreadsheet FNCE4408_Assignment-02.xlsx, form a COVERED CALL strategy with the stock and the Jan 110 CALL option. At maturity, determine: ( Answers should be to two...

Q:

D Question 1 An interest rate is 6% per annum with quarterly compounding. What is the equivalent rate with continuous compounding? 5.96% O6.21% 06.09% 5.83% Question 2 3.75% The two-year zero rate is...

Q:

The following are my economics question.... 2. For each of the following, illustrate the shift of one of the curves in the AS/AD model: a Business confidence rises as firms expect an increase in GDP,...

Q:

Suppose you have a call option on a stock with a strike price of $22. Fill in the stock price and strike price in the table and calculate the exercise value (10 points) Plot the Stock price on the...

Q:

How can a residual income approach to performance evaluation reduce the likelihood of sub-optimization?

Q:

Write a note on Marketing Problems.

Q:

Use the Divergence Theorem to compute the net outward flux of the vector field F equals = Bold r StartAbsoluteValue Bold r EndAbsoluteValue rr equals = left angle x , font size decreased by 6 y ,...

Q:

During the year he incurred the following expenses: Insurance premium- own (Policy value Tk. 70,000) Tk. 7,100; Insurance premium- spouse (Policy value Tk. 40,000) Tk. 3,700; Deposited to pension...

Q:

Given f = ax? + x + y + xz2, where a is some constant parameter. %3D Determine a = (positive integer), if the largest possible rate of change of f at point (1,0, 1)is given by 20- Use the the value...

Q:

Either print a copy of your worksheet or make a copy of the worksheet in your workbook before proceeding. You will need to refer back to this worksheet. Change the percentage completion with respect...

Q:

Write a Python class Absolute Progression that extends the Progression class such that each value in the progression is the absolute value of the difference between the previous 2. Your constructor...

Q:

A shaft carries five masses A, B, C, D and E which revolve at the same radius in planes which are equidistant from one another. The magnitude of the masses in planes A, C and D are 50 kg, 40 kg and...

Q:

You want to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 8% interest, compounded...

Q:

Two investors are evaluating General Electrics stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the...

Q:

Are lessees more likely to be in higher or lower income tax brackets than lessors?

Q:

6. Graduate Teaching Assistants A team of researchers investigated the level of preparation of economics graduate students for their teaching- related duties for students at top-tier and those at...

Q:

3. Discovery-Based Teaching Two biology instructors set out to evaluate the effects of discovery- based teaching compared to the standard lecture-based teaching approach in the laboratory.The...

Q:

5. Babys Sleeping Position II The researchers in Exercise 4 also measured several other developmental milestones and their relationship to the infants predominant sleep position.15 The results of...