The continuously-compounded risk-free interest rate

Reference no: EM13521951

A 10-month European call option on a stock is currently selling for $5. The stock price is $64the strike price is $60. The continuously-compounded risk-free interest rate is 5% per annum for all maturities.

1) Suppose that the stock pays no dividend in the next ten months, and that the price of a 10-month European put with a strike price of $60 on the same stock is trading at $1. Is there an arbitrage opportunity? If yes, how can you take advantage of it to make profit?

2) Now suppose instead that a dividend of $10 will be paid in six months. What price do you expect a 10-month European put with a strike price of $60 on the same stock to be trading at?

Reference no: EM13521951

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