The a2 Milk Company shares are trading at $6.22 per share. In one month's time, they...

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The a2 Milk Company shares are trading at $6.22 per share. In one month's time, they will pay a 50 cent dividend. Interest rates (with continuous compounding) are 3.1% per annum. (a) A European put option is trading with strike price $7.15, maturing in 8 months time. If the put option has a price of $1.25, what is the arbitrage opportunity? 5 marks (b) A European call option with strike price $5.90 and maturity in 6 months trades at $1.10. What must the price of a put option with the same strike and maturity to avoid arbitrage opportunities? How would you trade if this puts price was $1.25 cents? 5 marks The a2 Milk Company shares are trading at $6.22 per share. In one month's time, they will pay a 50 cent dividend. Interest rates (with continuous compounding) are 3.1% per annum. (a) A European put option is trading with strike price $7.15, maturing in 8 months time. If the put option has a price of $1.25, what is the arbitrage opportunity? 5 marks (b) A European call option with strike price $5.90 and maturity in 6 months trades at $1.10. What must the price of a put option with the same strike and maturity to avoid arbitrage opportunities? How would you trade if this puts price was $1.25 cents? 5 marks

Answer rating: 100% (QA)

a The arbitrage opportunity is to buy the put option and sell the underlying ... View the full answer