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What is total initial investment

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Two parts; please show excel inputs to get the answers

a. A share of ABC Corp. is currently trading at $59 per share. European call and put options are available with an exercise price of $60 at a price of $4.74 and $3.51, respectively. They can be exercised in exactly six months. The current xix-month Treasury bill rate (annualized) is 6.25%. ABC Corp. does not currently pay dividends.

Suppose that you purchase one share of stock and one put option. You also sell one call option.

(a) What is your total initial investment?

(b) What will be the payoff of this portfolio in six months?

(c) What is the annualized risk-free rate of return for this portfolio?

(d) Notice the observed difference between the call price and put price is $1.23. Calculate the "no-arbitrage" difference that would exist in an efficient market, given the current risk-free interest rate?

(e) Would investors buy or sell call options in order to take advantage of an arbitrage opportunity? Would investors buy or sell put options?

b. A share of ABC Corp. is currently trading at $59 per share. The six-month-ahead forward price for a share of ABC Corp. is currently $60 per share. The current xix-month Treasury bill rate (annualized) is 6.25%. ABC Corp. does not currently pay dividends.

(a) Calculate the "no-arbitrage" forward price that would exist in an efficient market, given the current spot price and risk-free interest rate?

(b) Would investors buy or sell shares of ABC Corp. in order to take advantage of an arbitrage opportunity? Would investors buy or sell forward contracts?

Reference no: EM133076526

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