The spot price of corn is 301.40 cents per bushel. The three-month futures price on corn is 316.2 cents per bushel. The two-month call option on this corn futures with an exercise price of 330 cents per bushel is priced at $3.50. The two-month put option on this corn futures with an exercise price of 330 cents per bushel is priced at $12.70. The continuously compounded risk-free rate is 2.3%. Construct a risk-free arbitrage strategy with positive cash flow at time 0 and zero cash flow at the option expiration time T. Show the time 0 and time T cash flows in two separate tables.

The spot price of corn is 301.40 cents per bushel. The three-month futures price on corn is 316.2 cents per bushel. The two-month call option on this corn futures with an exercise price of 330 cents per bushel is priced at $3.50. The two-month put option on this corn futures with an exercise price of 330 cents per bushel is priced at $12.70. The continuously compounded risk-free rate is 2.3%. Construct a risk-free arbitrage strategy with positive cash flow at time 0 and zero cash flow at the option expiration time T. Show the time 0 and time T cash flows in two separate tables.

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter18: Derivatives And Risk Management

Section18.A: Valuation Of Put Options

Problem 1P

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D & R A1 4

Question 4. Put-Call Parity for Options on Futures

Construct a risk-free arbitrage strategy with positive cash flow at time 0 and zero cash flow at the option expiration time T. Show the time 0 and time T cash flows in two separate tables.

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