Question

( 8) Suppose that: p stock). The put option expires in 1 year. Is there an arbitrage opportunity? $37, T- 1.0, r-5%, X - $39, D-0, (non-dividend-paying $1.50, So

Answer 1

Stock price,So =37

Strike Price,X=39

Dividend,D=0

p=1.5

Time,T=1 year = 12 months

r=5%

Present Value of strike price=39(e)^-.05*12/12
=39(0.951)
=37.089
Current Stock price=37
So PV of strike price - current stock price should be greater than put price for an arbitrage to exist:
but 37.089-37=0.089 < 1.50

Hence No,Arbitrage opportunity exists.