Fnd the no-abritrage price of the put option

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A European call option is on sales in the market at a price of $3. The underlying asset is now at $10. The strike price of the call is $12 and the maturity period of the call are 2 years. Risk-free rate provided in the market is 6%.

(a) Using put-call parity, ?nd the no-abritrage price of the put option if the strike price and the maturity period of the put is the same as the call option provided.

(b) From the result of part (a), if the put price is $4, form a risk-free portfolio such that you earn a risk-free pro?t. Explain your payoff in each scenario of the underlying asset two years later.

(c) Explain, in Economics sense, how the action in part (b) would drive down the price of the put option to the correct price predicted by put-call parity

Reference no: EM133056620

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