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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)]

#### Solution Preview

Dear Student,

Please see below for the step by step procedure in solving the problem

OTA 108347

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 ...

#### Solution Summary

Buy call and sell put options are demonstrated. Step by step calculations are provided in the solution.

\$2.19