Mr. John Barker, who is a market maker at CBOE, notices the following quotes in his hand-held device. The price of Macrohard stock is $66 per share. The European call option on the stock, with strike price $70 and expiration date in six months, is quoted for $4 per share. The European put option on the same stock, with the same strike price and the same expiration date, is quoted for $5.5 per share. A dividend of 50 cents is expected in two months. The interest rate is 5%. A. Is there an arbitrage opportunity to Mr. John Barker? How much is the arbitrage profit per share of the stock? B. Describe your arbitrage strategy in words and then use a table to show the cash flows of your arbitrage strategy.
Mr. John Barker, who is a market maker at CBOE, notices the following quotes in his hand-held device. The price of Macrohard stock is $66 per share. The European call option on the stock, with strike price $70 and expiration date in six months, is quoted for $4 per share. The European put option on the same stock, with the same strike price and the same expiration date, is quoted for $5.5 per share. A dividend of 50 cents is expected in two months. The interest rate is 5%. A. Is there an arbitrage opportunity to Mr. John Barker? How much is the arbitrage profit per share of the stock? B. Describe your arbitrage strategy in words and then use a table to show the cash flows of your arbitrage strategy.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Mr. John Barker, who is a market maker at CBOE, notices the following quotes in his hand-held device. The price of Macrohard stock is $66 per share. The European call option on the stock, with strike price $70 and expiration date in six months, is quoted for $4 per share. The European put option on the same stock, with the same strike price and the same expiration date, is quoted for $5.5 per share. A dividend of 50 cents is expected in two months. The interest rate is 5%.
A. Is there an arbitrage opportunity to Mr. John Barker? How much is the arbitrage profit per share of the stock?
B. Describe your arbitrage strategy in words and then use a table to show the cash flows of your arbitrage strategy.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education