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Describe how an arbitrageur would trade

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Reference no: EM133002637

A European call that expires in six months and has a strike price of $30 is priced at $2. The underlying stock price is $29. The term structure is flat, with all risk-free rates being 10%.

Problem a) What is the price of a European put option that also expires in six months and has a strike price of $30?

Problem b) Is there any arbitrage opportunity if the price of the put option is $1.25? If so, describe how an arbitrageur would trade.

Reference no: EM133002637

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