What is the net cash flow of this arbitrage strategy at the


The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) Exercise price ($) Stock XLT 21.50 - Call option on Stock XLT 5.50 21.00Put option on Stock XLT 4.50 21.00Both of these options will expire 91 days from now, and the annualized yield for the 91-day Treasury bill is 3.0%. a. Briefly explain how to construct a synthetic Treasury bill position. b. Calculate the annualized yield for the synthetic Treasury bill in Part a using the market price data provided. c. Describe the arbitrage strategy implied by the difference in yields for the actual and synthetic T-bill positions. Show the net, riskless cash flow you could generate assuming a transaction involving 21 actual T-bills and 100 synthetic T-bills. d. What is the net cash flow of this arbitrage strategy at the option expiration date, assuming that Stock XLT trades at $23 at expiration three months from now?

Request for Solution File

Ask an Expert for Answer!!
Finance Basics: What is the net cash flow of this arbitrage strategy at the
Reference No:- TGS0612946

Expected delivery within 24 Hours