medium · Principles of Finance risk-return-portfolio
An investor holds a European call and wants to check for arbitrage using put-call parity. The stock is at 100, a 6-month call with strike 100 is 6.50, and a 6-month put with strike 100 is 4.50. The risk-free rate is 4.0% (continuous).
What is the parity-implied value difference?
- The call is underpriced by 1.98
- The market is in perfect parity
- The call is overpriced by 0.02
- The put is overpriced by 0.02
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