Price of the stock $50.00
Interest rate 5%
Price of a $50 bond discounted at the current interest rate $47.62
Price of a call to buy the stock at $50 $4.38
Price of a put to sell the stock at $50 $4.00an arbitrage opportunity exists. Unfortunately you construct the wrong positions (do everything backwards). Verify that you always lose at the following prices of the stock: $40 $45 $50 $55 and $60.2.Black-Scholes demonstrates that the value of a put option increases the longer the time to expiration. Currently the price of a stock is $100 and there are two put options to sell the stock at $100. The three-month option sells for $7.00 and the six-month option sells for $4.50. a) What would you do and why? b) How much do you earn or lose after three months at the following prices of the underlying stock ($85 $90 $95 $100 $105 and $110)? Assume the worst-case scenario. c) Is there any reason to anticipate earning a higher return than your answers in (b)?
