What arbitrage opportunities exist

Assignment Help Financial Management

Reference no: EM131967557

1-A European call option with strike $40 expiring in 6 months is priced at $3.25. The underlying is a dividend paying stock, currently priced at $39.50. The stock is expected to pay dividends of $0.75 in 2 and 5 months. The risk-free rate is 3% per year. What is the price of a 6 month European put option with strike $40?

a) If the market value of a put option on the same underlying, having the same strike and expiring in 6 months is $3.5, what arbitrage opportunities exist?

b) If the market value of a put option on the same underlying and having same strike and expiring in 6 months is $6, what arbitrage opportunities exist?

2-A European put option with strike $35 expiring in 6 months is priced at $4.25. The underlying is a dividend paying stock, currently priced at $34.5. The stock is expected to pay dividends of $0.85 in 3 and 8 months. The risk-free rate is 3% per year. What is the price of a 6 month European call option with strike $35?

a) If the market value of a call option on the same underlying, having the same strike and expiring in 6 months is $5, what arbitrage opportunities exist?

b) If the market value of a call option on the same underlying, having the same strike and expiring in 6 months is $2, what arbitrage opportunities exist?

Please show work and formula used in order to obtain the answer.

Reference no: EM131967557

Questions Cloud

Rosie will withdraw her interest earnings and spend : Rosie will withdraw her interest earnings and spend it as soon as possible. Andy will reinvest his interest earnings into his account.

Reflects the historic financial information of the entity : The Financial statements of a company are the document that reflects the historic financial information of the entity.

Calculate the incremental annual free cash flow for project : he marginal tax rate will be 40 percent. Calculate the incremental annual free cash flow for the project.

Which air-conditioning system should you purchase : Assume that the opportunity cost of capital is 12 percent. Which air-conditioning system should you purchase?

What arbitrage opportunities exist : If the market value of a put option on the same underlying, having the same strike and expiring in 6 months is $3.5, what arbitrage opportunities exist?

Old production line in evaluating the rebuilding plan : How should the company treat the cost of $500,000 of the old production line in evaluating the rebuilding plan?

Hat coupon rate do you need to set : If you want to issue new 10-year coupon bonds at par, what coupon rate do you need to set?

Sales using regression to estimate trend : What would be the forecast for next year’s sales using regression to estimate a trend?

What is the aftertax cash flow from the sale of asset : If the relevant tax rate is 31 percent, what is the aftertax cash flow from the sale of this asset?

User Account

All Pages