Question

Maybank shares are currently trading at RM10.00 in the stock market. 3-month call and put options with RM 10.00 exercise price are being quoted at RM0.90 and RM0.50 respectively. The risk-free rate is currently at 6% per year. Assume European options.

(a) Using put-call parity and applying both mathematical and diagram method prove that there are mispricing on the spot price, call and put options.

(b) Indicate your arbitrage strategy and compute the profit amount you can make for one lot/contract. Assume that 3 months later Maybank share is at RM11.00.

Answer 1

 

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