A european put option on dow chemical dow witha strike

Reference no: EM13620101

A European put option on Dow Chemical (DOW) witha strike price of 42 and 1 year to expiration is trading at a price of $5.50. A European call option on DOW with a strike price of 42 and 1 year to expiration is trading at a price of $3.34. The risk free interest rate is 2.0202% per year, compounded continously (the present value of a risk free dollar due in one year is $0.98). Assuming that the market price of DOW's stock is $40 per share, determine whether there is an opportunity to make a risk free profit. (Hint: Determine whether the prices above are consistent with put-call parity. Then figure out a way to sell the overpriced security and hedge by purchasing the low-price substitute.)

Reference no: EM13620101

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