Is there an arbitrage opportunity here

Reference no: EM133633294

Question: CSCO is trading at $37.85 and does not pay dividends. The implied volatility of the December 38 Call is 18%. These options are American-style, but it may be assumed that the probability of early exercise of the puts is negligible, given the low interest environment.

The December options expire on Saturday, December 23, 2017 (last traded the day before) and the 1-month T-bill (with a maturity closest date to the expiration date) is yielding 1.25%on a discount basis.

1. Assuming that the transaction costs and spreads are negligible, is there an arbitrage opportunity here? Explain. If your answer is 'yes', how would you execute it?

2. Fill in the blanks for the missing data in the table, based on the relationships between the risk parameters. Remember that the underlying asset does not pay a dividend.

Assume also that the theta is measured per day, while the vega is measured per % change in volatility.

3. Would it make any difference to your answers to the above questions if CSCO paid a dividend? Explain in words and equations without calculations

Reference no: EM133633294

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