XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with

Question:

XYZ shares are currently trading at $23. There are two options written on XYZ shares available in the market with the same strike of $24 and maturity of 18 months. Information regarding these two options is as follows: Call options trading at $3.32. You calculate the fair price of this call option is $3.68.Put options trading at $3.20. You calculate the fair price of this put option is $2.94. The risk-free rate is 5% compounded continuously. Prove that an arbitrage opportunity exists using put and call parity.

Transcribed Image Text:

Describe a trading strategy to exploit the above arbitrage opportunity. The table below may be

useful.

Strategy

Cost

PAYOFF

ST > X

ST < X
Expert Answer:
Answer rating: 100% (QA)
To prove that an arbitrage opportunity exists using put and call parity we can compare the cost of constructing a synthetic call option and a synthetic put option with the actual prices of the call an
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