The price of a non-dividend-paying stock is $50 and the price of a 4-month European call option on the stock with a strike price of $50 is $3. Thne risk-free rate is 4% per annum. The price of the corresponding 4-month European put option with same strike price is $2. Establish which of the following options is true. O1. None of the above. O II. There are arbitrage opportunities because the put-call parity relation does not hold. The arbitrage opportunity is given by selling short the put option and the stock and buying the call option. The proceeds of this strategy are invested at the risk-free rate until the expiration date. O II. There are no arbitrage opportunities as the put-call parity relation holds. O IV. There are arbitrage opportunities because the put-call parity relation does not hold. The arbitrage opportunity is given by selling short the call option and borrowing money from the bank at the risk-free rate to buy the stock and put option.

The price of a non-dividend-paying stock is $50 and the price of a 4-month European call option on the stock with a strike price of $50 is $3. Thne risk-free rate is 4% per annum. The price of the corresponding 4-month European put option with same strike price is $2. Establish which of the following options is true. O1. None of the above. O II. There are arbitrage opportunities because the put-call parity relation does not hold. The arbitrage opportunity is given by selling short the put option and the stock and buying the call option. The proceeds of this strategy are invested at the risk-free rate until the expiration date. O II. There are no arbitrage opportunities as the put-call parity relation holds. O IV. There are arbitrage opportunities because the put-call parity relation does not hold. The arbitrage opportunity is given by selling short the call option and borrowing money from the bank at the risk-free rate to buy the stock and put option.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 35QA

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