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In: Finance
The following options are available: 3-month European call with a strike price of $20 that is priced at $1.00
Solutions
Expert Solution
1)
Arbitrage Trades
Buying Call options
3-month European call with a strike price of $20 that is priced at $1.00
Currently, the price of the underlying stock is $25.50
= $25.50-($20+$1.00)
= $4.5
2)
For each set of trades you will make, please describe the trades you do and how much money you will make.
3-month European call with a strike price of $20 that is priced at $1.00
Currently, the price of the underlying stock is $25.50
= Stock Price - Strike Price
= $25.50-($20+$1.00)
= $4.5
3-month European put with a strike price of $20 that is priced at $4.00
Currently, the price of the underlying stock is $25.50
= Strike Price - Stock price
= $20- $25.50
= 0
The PUT option is worthless
3-month call with a strike price of $25 that is priced at $8.50
Currently, the price of the underlying stock is $25.50
= Stock - (Strike Price + Premium )
= $25.50 - ($25+ $8.50)
= -$8.0
3-month put with a strike price of $25 that is priced at $7.00
Currently, the price of the underlying stock is $25.50
= Strike - Stock
= $25 - $25.50
= 0
(Option is worthless)
If we factor in interest rate let's say 4% for the profit-making options
3-month European call with a strike price of $20 that is priced at $1.00
Currently, the price of the underlying stock is $25.50
= Stock Price - Strike Price /(1+4%*3/12)
= $25.50-($20+$1.00)
= $25.50- ($19.80+$1.00)
= $4.70
By factoring in the interest rate and the present value of the strike price, we will make more profit.
Previous profit i.e.$4.50 < $4.70.
1) Arbitrage Trades is $4.5.
Junaid answered 2 years agoRelated Solutions
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