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A European call option and put option on a stock both have a strike price of $21 and an expiration date in 4 months. The call sells for $2 and the put sells for $1.5. The risk-free rate is 10% per annum for all maturities, and the current stock price is $20. The next dividend is expected in 6 months with the value of $1 per share.
(a) Describe the meaning of "put-call parity".
(b) Check whether the put-call parity holds.
(c) If the put-call parity does not hold, describe step-by-step how an investor can take the advantage of this arbitrage opportunity to make a profit.
(d) If these two options are American options rather than European options, briefly explain whether the put-call parity still holds here.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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