Describe the arbitrage strategy

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Reference no: EM131920737

Suppose ABC stock currently is trading at $60 per share, has an annualized standard deviation of .35 , and will not pay any dividends over the next three months; also suppose that the continuously compounded annual risk-free rate is 6%.

Using Black-Scholes OPM, calculate the equilibrium price for the three-month ABC 60 European call option.

Using Black-Scholes OPM, calculate the equilibrium price for the three-month ABC 60 European put option.

Show the Black-Scholes put price is the same price obtained using the put-call parity model.

Describe the arbitrage strategy you would pursue if the ABC 60 call was overpriced and if it was underpriced.

What would be the new equilibrium price of the ABC call and put if ABC stock increased to $60.50?

Reference no: EM131920737

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