Can you perform an arbitrage

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Reference no: EM132861419

Problem - You are quoted the following prices:

The spot price of a one-year zero-coupon bond of face value £100 is £95.

The spot price of XYZ is £98 per share.

A XYZ call option with maturity one year and strike £100 costs £16.84.

 A XYZ put option with maturity one year and strike £100 costs £14.84.

You know that XYZ will pay no dividends for one year.

(a) Is there an arbitrage opportunity? If so, construct the corresponding arbitrage table.

(b) Suppose that short-selling XYZ shares requires you to pay a transaction fee of 2% of the amount transacted. Can you perform an arbitrage assuming you have no XYZ shares in your portfolio? Ignore all other transaction costs.

(c) In the context of part (b), suppose now that you already own a portfolio of 1000 shares in XYZ. Is there a way to make money? How much?

Reference no: EM132861419

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