It is now the end of Dec 2020. Risk-free interest rate is 10% p.a. for all...

It is now the end of Dec 2020. Risk-free interest rate is 10% p.a. for all maturities (continuous compounding). Entries in the table below (in italics) represent European put option prices on the stock of FGH. The current stock price of FGH is $21.00. FGH does not pay dividends.

Exercise price of European Put	Option prices
Exercise price of European Put	Expiry: End March 2021	Expiry: End June 2021
K=$21	$5.50	Not traded
K=$25	$5.00	Not traded
K=$30	Not traded	$7.25

Note K=Exercise price

Is the following put option on FGH’s shares mispriced? Clearly explain why and show reasoning/working

- Option expiring end of June 2021 with K=$30.00? If this option is mis-priced also clearly state how you would exploit any arbitrage opportunity and any expected arbitrage profit. If required assume long or short sales of shares are allowed and that you can borrow or lend at the risk free rate. Ignore all transaction costs other than the cost of borrowing and lending.

Expert Solution

ekkarill92 answered 2 years ago

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