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Problem 1:
You are a trader who trades both puts and calls on SleazeCo. Information about current market conditions is displayed below.
Stock Price Exercise Price Expiration Date Call Price Put Price
88 90 1/12th of a year 2.8546 4.6032
88 95 1/12th of a year 1.2978 7.8240
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.
3. The volatility of the return on SleazeCo. stock is 35 percent per year (i.e.,). What are the Black-Scholes values for the calls and puts above?
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