Explain deviations of the actual price from fair value

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The stock of Delta, Inc. is selling now for $40. A year from today it will sell for either $30 or $120. The risk-free interest rate is 4%, and a call option on Delta, Inc. with an exercise price of $50 is available.

What is the fair (i.e. arbitrage-free) value of the call?

The call is selling at $10. Show that you can create an arbitrage position to take advantage of the difference between the price of the call and its arbitrage-free value.

Research the information on StockTrak about shares of Apple and options on them. Pick a put option and call option with the same strike (exercise) price, which is "close to the money," that is, options with a strike (exercise) price close to the current stock price.

Use put/call parity to calculate the fair value of the put option. (Assume that the annual risk-free rate is 1.5%).

Is the actual price of the put option equal to its fair value according to the put/call parity? What can explain deviations of the actual price from the fair value?

Reference no: EM133495658

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