Suppose a stock's price is $38. and the comtinuously compounded interest rate is 6.5%. The stock...
Homework Answers
As per Put Call Parity, the prices of options with same strike price & expiry date are as follows:
Price of Call + PV of Exercise Price = Spot Price (Current Stock Price) + Price of Put
Therefore,
1.93 + [40*(e^(-0.065*3/12))] = 38 + P
1.93 + [40*(e^-0.01625)] = 38 + P
1.93 + [40*0.98385(from table)] = 38 + P
1.93 + 39.354 – 38 = P
Therefore, Price of Put = P = 3.284
Actual Price of Put > Theoretical Price. Therefore, Put is Overvalued.
Arbitrage Strategy:
As Put is Overvalued, Buy Call Option, Sell Stock Now, Sell Put Option
Add Answer to:
Suppose a stock's price is $38. and the comtinuously compounded
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