arbitrage opportunity
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Given the following information, does an arbitrage opportunity exist? If so, how would an arbitrageur take advantage of this opportunity?
Call price $3.60
Put price $0.40
Market stock price $42.00
Exercise price $40.00
Expiration 90 days
T-bill rate 6.00%.
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Solution Summary
The solution considers how would an arbitrageur take advantage of an arbitrage opportunity.
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Yes, an arbitrage opportunity does exist.
This situation violates the put-call parity equation. The idea is that a portfolio comprised of a call option and cash equal to the present value of the strike price has, at the time of expiration of the options, an equal payoff to ...
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