1) Identify if there is any arbitrage opportunity and state what to do to earn an...

1) Identify if there is any arbitrage opportunity and state what to do to earn an arbitrage profit

2) calculate arbitrage profit using the following information:

Stock price = 110 Call Price = 17 Put Price = 5 Risk free interest rate = 5% Maturity for options = 1 year Strike price for Put and Call: X = 105

Expert Solution

	Buy the call, short the stock	Sell the put, long the stock	Risk free return %	Price after 1 year
Option price	17.00	5.00
Strike Price	105.00	105.00	(e^.05)
Stock Price	110.00	110.00	1.05	115.64
Total Outflow after 1 years	122.00	Option not exercised
Total inflow	115.64	Since strike price < stock price
Gain	-6.36

jeff jeffy answered 2 years ago

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