The current price of stock XYZ is 100. In one year, the stock price will either be 120 or 80. The annually compounded risk-free interest rate is 10%. i. Calculate the no-arbitrage price of an at-the-money European put option on XYZ expiring in one year. ii. Suppose that an equivalent call option on XYZ is also trading in the market at a price of 10. Determine if there is a mis-pricing. If there is a mis-pricing, demonstrate how you would take advantage of the arbitrage opportunity.
The current price of stock XYZ is 100. In one year, the stock price will either be 120 or 80. The annually compounded risk-free interest rate is 10%. i. Calculate the no-arbitrage price of an at-the-money European put option on XYZ expiring in one year. ii. Suppose that an equivalent call option on XYZ is also trading in the market at a price of 10. Determine if there is a mis-pricing. If there is a mis-pricing, demonstrate how you would take advantage of the arbitrage opportunity.
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
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The current price of stock XYZ is 100. In one year, the stock price will either be 120 or 80. The annually compounded risk-free interest rate is 10%. i. Calculate the no-arbitrage price of an at-the-money European put option on XYZ expiring in one year. ii. Suppose that an equivalent call option on XYZ is also trading in the market at a price of 10. Determine if there is a mis-pricing. If there is a mis-pricing, demonstrate how you would take advantage of the arbitrage opportunity.
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