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Missi Corp. shares are currently trading at $14.00 each. A three-month put option on this share...

Missi Corp. shares are currently trading at $14.00 each. A three-month put option on this share is priced $0.50 at a strike price of $15.00. The risk free interest is 10% per annum for all maturities. Observing this data, identify and calculate what are the arbitrage opportunities available.  

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Expert Solution

Purchase the share at 14 and 3 months put option

Outflow = Share price + Premium amount

           = 14 + 0.50

           = $ 14.50

Inflow after 3 months = $15 ( Bare minimum )

Arbitrage Gain = Inflow - Outflow - Interest cost on outflow

                     = [ 15 - 14.50 - ( 14.50 * 10% * 3/12 ) ]

                    = [ 15 - 14.50 - 0.3625 ]

                   = $ 0.1375 Answer

jeff jeffy answered 1 year ago
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