a) (10 pts) Suppose that the stock price is $31, the risk-free interest rate is 9%...

a) (10 pts) Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the price of a three-month European call option is $2.69, and the price of a 3-month European put option is $2.25. Both options have the strike price $29. Assume monthly compounding. Describe an arbitrage strategy and justify it with appropriate calculations. Please write your solution in complete sentences. b) (10 pts) Use the same data as in part (a), but suppose now that the call price is $3.90 and the put price is $1.25. Assume monthly compounding. Is there still an arbitrage opportunity? Describe an appropriate strategy and justify it with appropriate calculations. Please write your solution in complete sentences.

Expert Solution

jeff jeffy answered 1 year ago

Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the...

Suppose that the stock price is $31, the risk-free interest rate is 9% per year, the price of a three-month European call option is $2.70, and the price of a 3-month European put option is $2.24. Both options have the strike price $29. Assume monthly compounding. Describe an arbitrage strategy and justify it with appropriate calculations. Please write your solution in complete sentences.

Derivatives Suppose the stock price is $31, the risk-free interest rate is 9% per year, the...

Derivatives Suppose the stock price is $31, the risk-free interest rate is 9% per year, the price of a three-month European call option is $2.69, and the price of a 3-month European put option is $2.25. Both options have the strike price $29. Assume monthly compounding. Describe an arbitrage strategy and justify it with appropriate calculations. Please write your solution in complete sentences.

suppose that the stock price $32, the risk-free interest rate is 10% per year the price...

suppose that the stock price $32, the risk-free interest rate is 10% per year the price of a 4 month european call option is $2.85, and the price of a 4 month european put option is $2.65. both options have the strike price $35. describe an arbitrage strategy and justify it with appropriate calculations.

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Suppose the risk-free rate is 3%. And the market interest rate is 5%. There are two...

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