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Suppose the call price is $14.10 and the put price is $9.30 for stock option where...

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Finance

Suppose the call price is $14.10 and the put price is $9.30 forstock option where the exercise price is $100, the risk free rateis 5 percent (continuously compounded), and the time to expirationis one year. Explain how you would create a synthetic stockposition and identify the cost. Suppose you observe a $100 stockprice; identify any arbitrage opportunity.

Answer & Explanation Solved by verified expert
3.6 Ratings (568 Votes)
To create a synthetic long stock position we must buy the calland sell the put with the same strike price 100 here So if theprice of the underlying stock goes above 100 the put option isworthless and will not be exercised    See Answer
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Suppose the call price is $14.10 and the put price is $9.30 forstock option where the exercise price is $100, the risk free rateis 5 percent (continuously compounded), and the time to expirationis one year. Explain how you would create a synthetic stockposition and identify the cost. Suppose you observe a $100 stockprice; identify any arbitrage opportunity.

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