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Single and multi-option arbitrage:
Step by step
Solved in 2 steps
- Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8. The risk-free rate is 5.2%, and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is )?Put–Call Parity The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and with 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?An investor has just obtained the following quotes for a European call option on a non-dividend paying Honeywell stock with a strike price of $18 and expiration date in one year. Stock price $20, Option price $3, and Risk free rate 10% annual. Find an arbitrage opportunity.
- 1. The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months with u = 1.1 and d = 0.9. Each step is 3 months, the risk free rate is 8%. Group of answer choices $2.24 $2.64 $2.84 $2.44A 4-month European call option on a stock (with dividend) is currently selling for RM5. The price of the stock is RM64 and the strike price is RM60. The risk-free interest rate is 12% p.a. A dividend of RM0.80 is expected one month from now. Is there any arbitrage opportunities? Show your working. How much is the profit/loss if at maturity the price of the stock is higher than the strike price? How much is the profit/loss if at maturity the price of the stock is lower than the strike price?A stock will pay a dividend of $3 in 4 months and $4 in 8 months. The current price of the stock is $408. If the risk-free rate for all maturities is 5.19%, what is the arbitrage profit of a 12-month forward contract on the stock if its current price is $600? Group of answer choices $230.685 $195.195 $177.45 $195.195 $221.813
- Give typing answer with explanation and conclusion What is the lower bound for the price of a 7-month European call option on a non-dividend-paying stock when the stock price is $44.02, the strike price is $39, and the risk-free interest rate is 1.3% per annum? Report your answer in dollars and cents.Assume a stock has a value of $100. The stock is expected to pay a dividend of $2 per share at year-end. An at-the-money European-style put option with one-year maturity sells for $7. If the annual interest rate is 5%, what must be the price of a 1-year at-the-money European call option on the stock?A one-month European call option on a non-dividend-paying stock is currently selling for $1. The stock price is $47, the strike price is $50, and the risk-free rate is 6% per annum (continuously compounded). What is the time value of a one-month European put on the same stock with the same strike price? A. $3.00 B. $3.75 C. $0.75 D. $0.00
- 1. A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19 and a $1 dividend is expected in one month. Identify the arbitrage opportunity to the trader.What is the lower bound for the price of a 7-month European call option on a dividend-paying stock when the stock price is $38.3, the strike price is $40, the risk-free interest rate is 1.1% per annum, and the stock is expected to pay a dividend of $2.56 in three months? Report your answer in dollars and cents.J-Rata Corp shares are currently trading at $30 each. It is expected to increase by 10% or decrease by 6% during the next two-three months. If its strike price at maturity in six months is set as $32 and the risk free rate is 8% per annum for all maturities: (a) Calculate its call options price and its put option price currently (b)Test and prove that the put-call parity is holding based on your option pricing.
