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As an option trader, you are constantly looking for opportunities to make an arbitrage transaction (i.e., a trade in which you do not need to commit your own capital or take any risk but can still make a profit). Suppose you observe the following prices for options on DRKC Co. stock: $3.18 for a call with an exercise price of $60, and $3.38 for a put with an exercise price of $60. Both options expire in exactly six months, and the price of a six-month T-bill is $97.00 (for face value of $100).
a. Using the put-call-spot parity condition, demonstrate graphically how you could synthetically recreate the payoff structure of a share of DRKC stock in six months using a combination of puts, calls, and T-bills transacted today.
b. Given the current market prices for the two options and the T-bill, calculate the no-arbitrage price of a share of DRKC stock.
c. If the actual market price of DRKC stock is $60, demonstrate the arbitrage transaction you could create to take advantage of the discrepancy. Be specific as to the positions you would need to take in each security and the dollar amount of your profit.
Discuss the different theories of interest structure and the advantages and disadvantages of each theory.
Details on how to carry out the project. Instead you are given guidance as to how you might go about these tasks and offered consultation services. How you construct the project is an important part of the project itself.
1. suppose the yield on short-term government securities perceived to be risk-free is about 3. suppose also that the
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