A put option with 60 days to maturity,exercise price of $12.00 and the risk-free rate is 5% p.a.If a call option is trading at $2.30 and a put option with $0.06 and the current share price is $14.00,what is the arbitrage possible per contract according to put-call parity?

A) $ \$ 0.00 $
B) $ \$ 0.02 $
C) $ \$ 0.06 $
D) $ \$ 0.10 $

Question

A put option with 60 days to maturity,exercise price of $12.00 and the risk-free rate is 5% p.a.If a call option is trading at $2.30 and a put option with $0.06 and the current share price is $14.00,what is the arbitrage possible per contract according to put-call parity?

A) $ \$ 0.00 $
B) $ \$ 0.02 $
C) $ \$ 0.06 $
D) $ \$ 0.10 $

Quizplus · Accepted Answer

Using equation 16.5,put-call parity can be written as c - g = P - PV(X).We can solve for what the call price (c)should be if there is no arbitrage possible;that is: c = 0.10 + 14.00 - 11.86 = $2.24.Hence,the call option value according to put-call parity is $2.24.Therefore,the call is mispriced by $2.30 - $2.24 = $0.06,and hence the arbitrage profit per contract is $0.06.

A Put Option with 60 Days to Maturity,exercise Price of $12.00