Show how to execute an arbitrage transaction

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Reference no: EM132075080

Suppose a stock currently trades at a price of K150. The stock price can go up 33 percentor down 15 percent. The risk-free rate is 4.5 percent.

i. Use a one-period binomial model to calculate the price of a put option with exerciseprice of K150.

ii. Suppose the put price is currently K14. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.

iii. Suppose the put price is currently K11. Show how to execute an arbitrage transaction that will earn more than the risk-free rate. Use 10,000 put options.

Reference no: EM132075080

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