- +1-530-264-8006
- info@tutorsglobe.com

Determine if there is opportunity to make risk-free profit

Problem:

A European put option on St. Paul Insurance (SPC) with a strike price of $40 and 1 year to expiration is trading at a price of $2. A European call option on SPC with a strike price of 40 and 1 year to expiration is trading at a price of $15. The risk-free interest rate is 5.129329% per year, compounded continuously (the present value of risk-free dollar to be received in one year is $0.95). If that the market price of SPC's stock is $50 per share, determine whether there is an opportunity to make a risk-free profit.

[Hint: If the prices above are not consistent with put-call parity, sell the overpriced security and hedge by purchasing the low-price substitute.]

Now Priced at $25 (50% Discount)

Recommended **(92%)**

18,76,764

Questions

Asked

21,311

Experts

9,67,568

Questions

Answered

Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!

Submit Assignment2015 © Tutors Globe. All rights reserved.

## Q : Returns on an investment

Returns on an investment are uncertain. You estimate the likelihood of alternative returns based on the estimated probabilities of possible outcomes: