Puts and calls on procter and gamble

Reference no: EM131016929

You are a trader who trades both puts and calls on Procter and Gamble. Information about current market conditions is displayed below.

Stock Price Exercise Price Expiration Date Call Price Put Price

88 90 1/12^th of a year 3.447 5

88 95 1/12^th of a year 2.131 8

The annualized continuously-compounded risk-free rate is .06 (6%).

1. Given the information above, are there any arbitrage opportunities?

2. If no, explain why. If yes, describe one set of trades you could make now to exploit the arbitrage opportunity. Show that this strategy generates an arbitrage profit.

Reference no: EM131016929

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