4500.2 - FINA 4500 Spring 2011 page 1 of 3 Problem Set 2:...

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FINA 4500 Spring 2011 page 1 of 3 Problem Set 2: Options in International Finance 1. The following prices are observed. Formulate an arbitrage strategy to profit from the situation (ignoring transactions costs). Digital Datawhack stock is selling for $95 per share. Call options on Digital Datawhack at 90, with a February expiration, are selling for $12 per share. Put options on Digital Datawhack at 90, with a February expiration, are selling for $2.50 per share. At the current T-Bill rate, $86 invested today would grow to $90 at the expiration date of the options. 2. The following prices are observed. Formulate an arbitrage strategy to profit from the situation (ignoring transactions costs). Arcott Labs stock is selling for $50 per share. Call options on Arcott Labs at 45, with expiration in nine months, are selling for $11 per share. Call options on Arcott Labs at 50, with expiration in nine months, are selling for $2 per share. Put options on Arcott Labs at 45, with expiration in nine months, are selling for $3 per share. Put options on Arcott Labs at 50, with expiration in nine months, are selling for $5 per share. At the current T-Bill rate, $42.70 invested today would grow to $45 (and $47.44 would grow to $50) at the expiration date of the options. 3. The following prices are observed. Show how to borrow money at the risk-free rate, using only option contracts. Morgenstern Labs stock is selling for $91.50 per share. Call options on Morgenstern Labs at 85, with expiration in nine months, are selling for $14.50 per share. Call options on Morgenstern Labs at 90, with expiration in nine months, are selling for $11.875 per share. Put options on Morgenstern Labs at 85, with expiration in nine months, are selling for $3.75 per share. Put options on Morgenstern Labs at 90, with expiration in nine months, are selling for $5.875 per share. At the current T-Bill rate, $85.50 invested today would grow to $90 (and $80.75 would grow to $85) at the expiration date of the options.
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FINA 4500 Spring 2011 page 2 of 3 4. Digital Datawhack stock rose by $2, from $60 to $62. “Crunch” Murdoch owns call
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4500.2 - FINA 4500 Spring 2011 page 1 of 3 Problem Set 2:...

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