You notice the following quotes for the FBM KLCI and the index options.) FBM KLCI = 1510 points 1500 call = 35 points 1500 put = 15 points At option maturity, two scenario is assumed 1. (FBM KLCI goes up to 1550 points) 2. (FBM KLCI goes down to 1450 points) (Assuming you can long/short the spot index, the risk-free rate of 2% per year and 90-day maturity for the options: ) (i)(Prove that there is mispricing by using Put-Call parity.) (ii)Outline the arbitrage strategy and show the arbitrage assuming you invested in one lot/contract. (iii) Explain the diagram of the overall position.) (iv) Show that your arbitrage strategy is indeed riskless.)
You notice the following quotes for the FBM KLCI and the index options.) FBM KLCI = 1510 points 1500 call = 35 points 1500 put = 15 points At option maturity, two scenario is assumed 1. (FBM KLCI goes up to 1550 points) 2. (FBM KLCI goes down to 1450 points) (Assuming you can long/short the spot index, the risk-free rate of 2% per year and 90-day maturity for the options: ) (i)(Prove that there is mispricing by using Put-Call parity.) (ii)Outline the arbitrage strategy and show the arbitrage assuming you invested in one lot/contract. (iii) Explain the diagram of the overall position.) (iv) Show that your arbitrage strategy is indeed riskless.)
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
You notice the following quotes for the FBM KLCI and the index options.)
FBM KLCI = 1510 points
1500 call = 35 points
1500 put = 15 points
At option maturity, two scenario is assumed
1. (FBM KLCI goes up to 1550 points)
2. (FBM KLCI goes down to 1450 points)
(Assuming you can long/short the spot index, the risk-free rate of 2% per year and 90-day maturity for the options: )
(i)(Prove that there is mispricing by using Put-Call parity.)
(ii)Outline the arbitrage strategy and show the arbitrage assuming you invested in one lot/contract.
(iii) Explain the diagram of the overall position.)
(iv) Show that your arbitrage strategy is indeed riskless.)
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 4 steps with 3 images
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