03 Dec In this assignment, you will solve problems on No-arbitrage Restrictions, Early Exercise and Put-Call Parity. Instructions? Use your textbook to answer the following questions from
Task
In this assignment, you will solve problems on No-arbitrage Restrictions, Early Exercise and Put-Call Parity.
Instructions
- Use your textbook to answer the following questions from Chapter 9:
- Exercise 12 and 13.
- Please, upload xls, xlsx file.
- Please, use the full computing power of Excel.
12. The current price of a stock is $60. The one-year call option on the stock at a strike of
$60 is trading at $10. If the one-year rate of interest is 10%, is the call price free from
arbitrage, assuming that the stock pays no dividends? What if the stock pays a dividend
of $5 one day before the maturity of the option?
13. The current price of ABC stock is $50. The term structure of interest rates (continuously
compounded) is flat at 10%. What is the six-month forward price of the stock?
Denote this as F. The six-month call price at strike F is equal to $8. The six-month
put price at strike F is equal to $7. Explain why there is arbitrage opportunity given
these prices.
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