Calculate the equilibrium value of a call option

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You gather the following information from the Wall Street Journal: Intel's stock is selling for $17, the risk-free rate is 3% and a put option on Intel is selling for $4.00 matures in one year and has an exercise price of $20.

a. Calculate the equilibrium value of a call option on Intel that has an exercise price of $20 and matures in one year.

b. You observe in the WSJ that the above call option is selling for $1.25. Is the market in equilibrium? If not, then pure arbitrage. (Hint to be a pure arbitrage you must show that there was zero net investment and a guaranteed profit.)

c. You observe in the WSJ that the above call option is selling for $2.00. Is the market in equilibrium? If not, then pure arbitrage. (Hint to be a pure arbitrage you must show that there was zero net investment and a guaranteed profit.)

Reference no: EM132700947

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