easy · Quantitative Finance derivatives
A European call and put on a non-dividend stock have the same strike K =100 and expiry T = 1. The risk-free rate is r = 5%. If the call trades at 12.00 and the put trades at7.50, and the spot price is $100, identify the arbitrage opportunity.
- The call is overpriced relative to the put; sell the call and buy the put.
- The put is overpriced relative to the call; sell the put and buy the call.
- The call is underpriced; buy the call and sell the stock.
- The options are correctly priced as the difference is within a typical bid-ask spread of $0.50.
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