How can you get a free lunch from the market

Reference no: EM13669021

1- A stock sells for $52 per share, and the 6-month European call on the stock with a strike price of $50 sells for $2.50. The stock is not expected to pay any dividends in next six months. The risk free interest rate is 4% per annum, continuously compounded. How can you get a free lunch from the market? Describe your transactions clearly.

2- An at-the-money three-month European call option on a non-dividend-paying stock has a market price of $1.27. The stock price is $20 and the risk-free interest rate is 8% per annum, with continuous compounding. Verify that the implied volatility is about 27%.

Reference no: EM13669021

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How can you get a free lunch from the market : 1- A stock sells for $52 per share, and the 6-month European call on the stock with a strike price of $50 sells for $2.50. The stock is not expected to pay any dividends in next six months. The risk free interest rate is 4% per annum, continuo..

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