Comparing Options Time to Expiry question
I have a question on ASM 10th edition Chapter 7 P.93 Example 7C.
For a nondivedend paying stock with price 21:
(i) The continuously compounded riskfree raye is 4%.
(ii) A European 3month put option on the stock with strike price 20 costs 1.00.
(iii) A European 6month put option on the stock with strike price 20.30 costs 0.90.
You take advantage of arbitrage. Assume that you sell one 3month put option and follow the optimal strategy, and that the stock price is 19 after 3 months and 21 after 6 months.
Determine your net profit after 6 months.
I cannot understand the answer on the manual, can anyone help?
Let's fight for 2018 Mar MFE exam!! Gook Luck All!
Last edited by Peter T.W. Chen; 11022017 at 02:35 AM..
