Answered

IDNLearn.com: Where your questions are met with thoughtful and precise answers. Our platform provides detailed and accurate responses from experts, helping you navigate any topic with confidence.

You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one-year risk-free interest rate is 8%. A one-year put on Intrawest with a strike price of $18 sells for $3.33, while the identical call sells for $7. Explain what you must do to exploit this arbitrage opportunity. Berk, Jonathan; DeMarzo, Peter; Harford, Jarrad. Fundamentals of Corporate Finance (2-downloads) (Berk, DeMarzo

Sagot :

Parrainidn

Answer:

Using the Put-Call parity principle where the following relationship holds:

Covered Call = Protective Put

Using the above, find the call price:

Call + Strike price / (1 + risk free rate) = Stock price + Put

Call + 18 / (1.08) = 20 + 3.33

Call + 16.67 = 20 + 3.33

Call = 23.33 - 16.67

Call = $6.66

The call option is overvalued at $7 so sell the Call option and buy the Put option and the Stock and borrow $16.67 which is the present value of the Put.

The net gain will be:

= 7 - 6.66

= $0.34

We appreciate your presence here. Keep sharing knowledge and helping others find the answers they need. This community is the perfect place to learn together. Thank you for visiting IDNLearn.com. We’re here to provide accurate and reliable answers, so visit us again soon.