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Assuming that a. you can buy a euro call with strike price of $1.50 for 3 cents b....

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Question

Finance

Assuming that

a. you can buy a euro call with strike price of $1.50 for 3cents

b. you can sell a euro put at the same strike price for 4cents

c. the prevailing forward rate is $1.54 per euro

d. the annual risk-free rate in the US is 6%.

Show how arbitrageurs can generate riskless profit. Explain howthe different prices will adjust

Answer & Explanation Solved by verified expert
3.9 Ratings (695 Votes)
As a first step lets check if Call Put parity is satisfied Call Put Parity equation is C PV K P S Or C PV K P S 0 Where C Call premium 3 cents 003 P Put premium 4 cents 004 K strike price 150 S Current forward rate 154 Risk free rate r 6 Time to maturity t not specified lets assume    See Answer
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Transcribed Image Text

Assuming thata. you can buy a euro call with strike price of $1.50 for 3centsb. you can sell a euro put at the same strike price for 4centsc. the prevailing forward rate is $1.54 per eurod. the annual risk-free rate in the US is 6%.Show how arbitrageurs can generate riskless profit. Explain howthe different prices will adjust

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