Month call and put price for European options at strike 108 are 0.29 and 1.70, respectively. Short-term risk-free interest rate is 2% per year.
a. Find current price of the stock using put-call parity.
b. Suppose another set of call and put options with 1-month maturity on the same stock at strike price of 106.5 is selling for 0.71 and 0.23, respectively. Is there any arbitrage opportunity at 106.5 strike price? Answer this by finding the amount of arbitrage profit available at strike price of 106.5. (Hint: Evaluate both sides of put-call parity and see if both sides are equal or not. If the sides are unequal, then there is arbitrage opportunity. Use stock price found in part a)
c. What would be the strategy to take advantage of arbitrage opportunity at 106.5, if there is any?