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)
Use put call parity to calculate the equilibrium market price for the call option.
c + Xe^(-rt) = p + So
We have r=10%
So p=15+60*e^(-10%*3/12)-68 = ...
Calculation and explanation given to support answers.