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What should be the arbitrage-free price of the put

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Problem

Question I. stock is trading at S = 50. There are one-month European calls and puts on the stock with a strike of 50. The call is trading at a price of CE = 3. Assume that the one-month rate of interest (annualized) is 2% and that no dividends are expected on the stock over the next month.

1. What should be the arbitrage-free price of the put?
2. Suppose the put is trading at a price of PE = 2.70. Are there any arbitrage opportunities?

Question II. A stock is trading at S = 60. There are one-month American calls and puts on the stock with a strike of 60. The call costs 2.50 while the put costs 1.90. No dividends are expected on the stock during the options' lives. If the one-month rate of interest (annualized) is 3%, show that there is an arbitrage opportunity available and explain how to take advantage of it.

Reference no: EM133583651

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