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1. Given the following: S=$68, C=$15, Rf =10%, X=$60, and time to maturity of call = 3 month. What is the value of a put with the same characteristics as the call above?

1. Given the following:
S=$68, C=$15, Rf =10%, X=$60, and time to maturity of call = 3 month.
a. What is the value of a put with the same characteristics as the call above?
b. Suppose that the put in part "a" is trading for $ 3.00: Indicate clearly the transactions you should undertake in order to create a risk-free arbitrage profit. What is the arbitrage profit? (Make sure to show the cash flows)

Solution Preview

Use put call parity to calculate the equilibrium market price for the call option.
c + Xe^(-rt) = p + So

We have r=10%
So=68
t=3 months
c=15
X=60
So p=15+60*e^(-10%*3/12)-68 = ...

Solution Summary

Calculation and explanation given to support answers.

$2.19