Question

We consider a European purchase right to expire in 4 months. The right is written in a share that does not pay a dividend, the current price of which is 64 euros. It is given that the exercise price is 60 euros and the interest rate without risk is 12% (on an annual basis). The price of the right is 5 euros. Examine whether there is an arbitrage opportunity and whether it is necessary to show in detail the steps required to achieve it.

Answer 1

Cash future arbitrage is basically anopportunity to earn risk-free profit from an unusual difference between cash and future prices in the stock market. There is normally an appreciable and exploitable difference between the Cash price and future price, especially at the beginning of the month.

Yes, there is an arbitrage opportunity

Current price is 64 euros+Interest for 4 months =64*12%*4/12=2.56 64+2.56=66.56 euros Exercise price is 60 euros 

Arbitrage=66.56 euros-60 Euros=6.56 Euros

The exercise price is the price at which an underlying security can be purchased or sold when trading a call or put option, respectively. The exercise price is the same as the strike price of an option, which is known when an investor takes a trade.

“Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms

• Arbitrage occurs when a security is purchased in one market and simultaneously sold in another market, for a higher price.
• The temporary price difference of the same asset between the two markets lets traders lock in profits.
• Traders frequently attempt to exploit the arbitrage opportunity by buying a stock on a foreign exchange where the share price hasn't yet been adjusted for the fluctuating exchange rate.
• An arbitrage trade is considered to be a relatively low-risk exercise.

Arbitrage describes the act of buying a security in one market and simultaneously selling it in another market at a higher price, thereby enabling investors to profit from the temporary difference in cost per share. In the stock market, traders exploit arbitrage opportunities by purchasing a stock on a foreign exchange where the equity's share price has not yet adjusted for the exchange rate, which is in a constant state of flux.

The price of the stock on the foreign exchange is therefore undervalued compared to the price on the local exchange, positioning the trader to harvest gains from this differential. Although this may seem like a complicated transaction to the untrained eye, arbitrage trades are actually quite straightforward and are thus considered low-risk.