Question

A European call option and put option on a stock both have a strike price of $$\$ 20$$ and an expiration date in 3 months. Both sell for $$\$ 3$$. The risk-free interest rate is $10 \%$ per annum, the current stock price is $$\$ 19$$, and a $$\$ 1$$ dividend is expected in 1 month. Identify the arbitrage opportunity open to a trader.

   A European call option and put option on a stock both have a strike price of $$\$ 20$$ and an expiration date in 3 months. Both sell for $$\$ 3$$. The risk-free interest rate is $10 \%$ per annum, the current stock price is $$\$ 19$$, and a $$\$ 1$$ dividend is expected in 1 month. Identify the arbitrage opportunity open to a trader.
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 11, Problem 25 ↓

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Step 1

First, let's calculate the present value of the dividend. Since the dividend is expected in 1 month, we need to discount it back to the present using the risk-free interest rate. The present value of the dividend is given by: $$\text{Present Value of Dividend} =  Show more…

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A European call option and put option on a stock both have a strike price of $$\$ 20$$ and an expiration date in 3 months. Both sell for $$\$ 3$$. The risk-free interest rate is $10 \%$ per annum, the current stock price is $$\$ 19$$, and a $$\$ 1$$ dividend is expected in 1 month. Identify the arbitrage opportunity open to a trader.
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