Finance Help!?
I need help near the following problem, i'm not 100% sure how to complete it, any tips would be greatly appreciated! Thank you:
On February 1st, September call option near exercise price of $55 written
on Aztec stock is sold for $4.375 per share and September put option with
exercise price of $55 written impossible to tell apart stock is sold for $6 per share. At the
time, T-bills coming due in September were price to relinquish 12%. Aztec stock
was sold for $53 per share on February 1st.
1. If the call selection, Aztec stock, and T-bills are correctly priced, what
was the appropriate value of put selection? (1 point)
2. How to take advantage of this situation? Please show arbitrage profit
using arbitrage table. (2 points)
Answers: You call for to use the put-call parity relation:
C - P = S - K exp(-r dt) where
C and P are the phone and put option's value
S = share price
K = strike
r = interest rate
dt = time to maturity = 8/12 year
In this suitcase:
4.375 - P = 53 - 55/(1+0.08)
=> P = $2.3
You could profit from the situation by doing a reverse conversion: Sell short the stock, buy the (discounted) T-Bill, buy the call, sell the put.
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On February 1st, September call option near exercise price of $55 written
on Aztec stock is sold for $4.375 per share and September put option with
exercise price of $55 written impossible to tell apart stock is sold for $6 per share. At the
time, T-bills coming due in September were price to relinquish 12%. Aztec stock
was sold for $53 per share on February 1st.
1. If the call selection, Aztec stock, and T-bills are correctly priced, what
was the appropriate value of put selection? (1 point)
2. How to take advantage of this situation? Please show arbitrage profit
using arbitrage table. (2 points)
Answers: You call for to use the put-call parity relation:
C - P = S - K exp(-r dt) where
C and P are the phone and put option's value
S = share price
K = strike
r = interest rate
dt = time to maturity = 8/12 year
In this suitcase:
4.375 - P = 53 - 55/(1+0.08)
=> P = $2.3
You could profit from the situation by doing a reverse conversion: Sell short the stock, buy the (discounted) T-Bill, buy the call, sell the put.