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