Question: The put-call parity rule can be expressed as C - P = [f0(T) - X] (1 + r) - T. Consider the following data: f0(T)

The put-call parity rule can be expressed as C - P = [f0(T) - X] (1 + r) - T. Consider the following data: f0(T) = 102, X = 100, r = 0.1, T = 0.25, C = 4, and P = 1.75. A few calculations will show that the prices do not conform to the rule. Suggest an arbitrage strategy and show how it can be used to capture a risk-free profit.
Assume that there are no transaction costs. Be sure your answer shows the payoffs at expiration and proves that these payoffs are riskless?

Step by Step Solution

★★★★★

3.41 Rating (170 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

f 0 X1 r T 102 100110 025 195 C P 4 175 225 C P is too high so ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

768-B-F-F-M (7166).docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

Use the put call parity relationship to demonstrate that an at- the- money call option on a non-dividend- paying stock must cost more than an at- the- money put option. Show that the prices of the...

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. July 155 b....

You are attempting to formulate an investment strategy. On the one hand, you think there is great upward potential in the stock market and would like to participate in the upward move if it...

16. The put-call parity rule can be expressed as CP = (f(T)-X) (1+r)-T. Con- sider the following data: f,(T) = 102, X = 100, r = 0.1, T = 0.25, C = 4, and P = 1.75. A few calculations will show that...

14. Using the information in problem 13, calculate the price of the put described in problem 6, using the Black model for pricing puts. 15. Suppose you observe a one-year futures price of $100, the...

Can someone please help me as soon as possible? Attachment is provided. Specific help is needed on the following problems by 11 pm central time 3 Check the following combinations of puts and calls,...

I need a step by step solutions for the 10 problems in the excel file. The correct answers are provided I only need the solutions steps. Subject is Finance (options valuation) On March 2, a Treasury...

Problem 1 (10 marks) Three years ago, you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate of 8% paid annually, and a face value of $1,000. Each year you reinvested...

1 MATH3075 Mathematical Finance (Normal) Due by 4 pm on Thursday, September 17, 2015 1. [10 marks] Elementary market model. Consider a single-period two-state market model M = (B, S) with the two...

Assignment 1 Instructions Assignment 1 should be submitted after you have completed Unit 2. This assignment is worth 15 percent of your final grade. Assignment 1 contains five problems. The maximum...

Forecast capacity levels review the information in Exhibit 13-1. The exhibit assumes three chairs and one 40-hour RN, for realistic capacity level of seven patients infused per day. Required: Prepare...

Greg Winston works for the federal government, and in 2016 he gets ten federal holidays off. (Look up the dates of these holidays on the internet.) Greg also gets every other Friday off, as well as...

I need help calculating the interest for this portion of the problem. It would also be helpful if you could help me do the total section. Show all images Show all images Show all images done loading

What are the three approaches to testing the differences in means among the included groups?

Marston Marble Corporation is considering a merger with the Conroy Concrete Company. Conroy is a publicly traded company, and its current beta is 1.30. Conroy has been barely profitable, so it has...

VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld's analysts project the...

Define each of the following terms: a. Multinational corporation b. Exchange rate; fixed exchange rate system; floating exchange rates c. Trade deficit; devaluation; revaluation d. Exchange rate...

To save for her newborn son's college education. Lea Wilson will invest $17,000 at the beginning of each year for the next 13 years The interest rate is 8 percent What is me future value? Use...

Big Blue University has a fiscal year that ends on June 30 . The 2019 summer session of the university runs from June 10 through July 26. Total tuition pald by students for the summer session...

Could anyone help on the below questions and provide steps and reasoning for that? Let X and u be (scalar) random variables. Select all of the following statements which are true. If E(u | X) = 0,...