hard · Quantitative Finance
An arbitrageur observes a six-month European call struck at 50 trading for 4.50 and a six-month European put struck at 50 trading for 2.50. The stock price is 51 and the risk-free rate is 4%.
According to Put-Call Parity (C - P = S_0 - Ke^-rT), is there an arbitrage opportunity?
- No, because C - P should equal S_0 - K, and 2.00 = 51 - 50 is close enough.
- Yes, because the call price should always be at least 5 higher than the put price when the stock is at 51.
- No, because the difference of 0.01 is too small to be an arbitrage.
- Yes, because the synthetic stock price C - P + Ke^-rT ≈ 51.01 is higher than the actual stock price.
Sign up free to see the explanation and track your rank →
More Quantitative Finance practice
- If the underlying stock price S moves by +$2.00 over a very short interval, what is the es
- What is the estimated OLS slope hatβ?
- If the flat yield curve is at 4% (continuously compounded), what is the bond's price?
- As the number of assets n approaches infinity, what happens to the total portfolio varianc
- What is the fair no-arbitrage price for a six-month (T = 0.5) forward contract?
- If the risk-neutral probability of an up move is p = 0.6 and the risk-free rate is zero, w
- When pricing a 'Digital' (or Binary) call option near expiry with the spot price very clos
- Calculate the price of a zero-coupon bond that pays $1000 in two years, given that the one