The strike price for a European call and put option is $55 and the expiration date for
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Question:
The strike price for a European call and put option is $55 and the expiration date for the call and the put is in three months. The call and the put both sell for $6. The price of the stock underlying the call and the put is $54 and the risk-free rate is 4% per annum based on continuous compounding. Identify any arbitrage opportunity and explain what the trader should do to capitalize on that opportunity. In the event, you determine an arbitrage opportunity exists, calculate possible payoffs from the arbitrage strategy.
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