Suppose you have the following information concerning a particular options. Stock price, S = RM 21 Exercise price, K = RM 20 Interest rate, r = 0.08 Maturity, T = 180 days = 0.5 Standard deviation, � = 0.5 The Call option value is 3.77. and put option value is 1.99 Suppose a European put options has a price higher than that dictated by the putcall parity. a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above) b. Name the options/stock strategy used to proof the put-call parity. explain c. What would be the extent of your profit in (a) depend on? explain

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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1. Suppose you have the following information concerning a particular options.
Stock price, S = RM 21
Exercise price, K = RM 20
Interest rate, r = 0.08
Maturity, T = 180 days = 0.5
Standard deviation, � = 0.5

The Call option value is 3.77. and put option value is 1.99

Suppose a European put options has a price higher than that dictated by the putcall parity.

a. Outline the appropriate arbitrage strategy and graphically prove that the arbitrage is riskless. Note: Use the call and put options prices above)
b. Name the options/stock strategy used to proof the put-call parity. explain
c. What would be the extent of your profit in (a) depend on? explain

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