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A 10-month European call option on a stock is currently selling for $5.

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A 10-month European call option on a stock is currently selling for $5. The stock price is $64the strike price is $60. The continuously-compounded risk-free interest rate is 5% per annum for all maturities.;1) Suppose that the stock pays no dividend in the next ten months, and that the price;of a 10-month European put with a strike price of $60 on the same stock is trading;at $1. Is there an arbitrage opportunity? If yes, how can you take advantage of it to make profit?;2) Now suppose instead that a dividend of $10 will be paid in six months. What;price do you expect a 10-month European put with a strike price of $60 on the;same stock to be trading at?;Additional Requirements;Level of Detail: Show all work

 

Paper#25498 | Written in 18-Jul-2015

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