The following bid and ask price and option prices were observed for a stock on May 14 of a particular year. Unless otherwise indicated, ignore dividends on the stock. The stock is priced at 161. The expirations are June 18, and July 16.

1- Using the information in the following table compute the risk-free rate

Maturity

Bid

Ask

06/17

5.95

5.85

07/16

6.1

5.95

Exercise Price

Call Price June

Call Price July

Put Price June

Put Price July

160

10.5

15

10.5

14

165

8.5

12

13.5

17

2- Compute the intrinsic values, time values, and lower bounds of the following calls. Identify any profit opportunities that may exist. Treat these as American options for purposes of determining the intrinsic values and time values and European options for the purpose of determining the lower bounds.

a. June 160

b. July 165

3- Compute the intrinsic values, time values, and lower bounds of the following puts. Identify any profit opportunities that may exist. Treat these as American options for purposes of determining the intrinsic values and time values and European options for the purpose of determining the lower bounds.

a. June 165

b. July 160

4- Examine the following pairs of calls, which differ only by exercise price. Determine whether either of them violates the rules regarding relationships between American options that differ only by exercise price.

a. June 160 and 165

b. July 160 and 165

5- Examine the following pairs of puts, which differ only by exercise price. Determine whether either of them violates the rules regarding relationships between American options that differ only by exercise price.

a. June 160 and 165

b. July 160 and 165

6- Check the following combinations of puts and calls and determine whether they conform to the put-call parity rule for European options. If you see any violations, suggest a strategy.

a. June 160

b. July 165