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Construct an arbitrage portfolio to take advantage

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Reference no: EM132402990

A stock price is $50. The value of a European call option with a strike price of $47.50 and maturity of 100 days is $4.375. The 100-day default-free discount rate is 5 percent, assuming a 360-day year.

a) For a put option with a strike price of $47.50 and maturity of 100 days, you are quoted a price of $2.125. Is this consistent with the absence of arbitrage? Please justify your answer.

b) If your answer to a) is that arbitrage is possible, how would you construct an arbitrage portfolio to take advantage of the situation?

Reference no: EM132402990

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