What is the net cash flow of this arbitrage strategy

Reference no: EM13274235

The common stock of Company XLT and its derivative securities currently trade in the market at the following prices and contract terms: Price ($) Exercise price ($) Stock XLT 21.50 - Call option on Stock XLT 5.50 21.00Put option on Stock XLT 4.50 21.00Both of these options will expire 91 days from now, and the annualized yield for the 91-day Treasury bill is 3.0%. a. Briefly explain how to construct a synthetic Treasury bill position. b. Calculate the annualized yield for the synthetic Treasury bill in Part a using the market price data provided. c. Describe the arbitrage strategy implied by the difference in yields for the actual and synthetic T-bill positions. Show the net, riskless cash flow you could generate assuming a transaction involving 21 actual T-bills and 100 synthetic T-bills. d. What is the net cash flow of this arbitrage strategy at the option expiration date, assuming that Stock XLT trades at $23 at expiration three months from now?

Reference no: EM13274235

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