Question

Question 3 (30 Points) (a) Assume that So 10 EUR and r price of a 9-months European put option with strike K 8 EUR is 2 EUR Compute the price of a 9-months European call option with same strike and same underlying. Which relation did you use? (b) A 6-month European call option on a non-dividend-paying stock is cur- rently selling for $3. The stock price is $50, the strike price is $55, and the risk-free interest rate is 6 % per annum contimuously compounded. The price for 6-months European put option with same strike, underlying and maturity is $2. What opportunities are there for an arbitrageur? Describe the strategy and compute the gain 3% continuously compounded. The

Answer 1

a. using put call parity, put price + stock price = PV of bond value + call price,here bond is equivalent to call option being exercised.

given S0 = 10EUR, PV of strike prive = 8/e^0.03*(9/12), Formula used = FV/e^rt = 7.82

call price = put price + stock price - PV of strike price = 2+10-7.82 = 4.1777

Since, there is more value for call option, the call option is in the money.