Please help with the following problem about international trade. Provide step by step calculations in the solution.
You observe that a non-dividend paying stock, with a current price of $50, has 1-year American calls and puts written on it, both with exercise prices of $50. The 1-year interest rate is 10%.
(a). If the calls were trading at $10 and the puts at $3, what trades would you enter into?
(b). If the calls were trading at $5 and the puts at $5, what trades would you enter into?
[Hint: an important thing in Q#2 is to determine whether you will (or will not) enter into such trades and why (or why not)]© BrainMass Inc. brainmass.com October 10, 2019, 2:09 am ad1c9bdddf
Please see below for the step by step procedure in solving the problem
First, list the given information.
S0 = Current stock price = $50
X = Exercise price = $50
r = 1 year interest rate = 10%
T = time = 1
Second, solve for the problems
(a). If ...
Buy call and sell put options are demonstrated. Step by step calculations are provided in the solution.