Introduction to derivatives, Fall 2011
BUSI 588, Case 3
Rocinante: put call parity and arbitrage
Please prepare for class discussion on Wednesday, 8/31.
Rocinante is considering trading on options on gold, the most liquid asset in medieval Europe (the
time and place where this case is set). Gold is currently trading at $101.45, and current prices
options on gold maturing in exactly one year and with strike price of $110 are given below.
call price
put price
Aug 110.00
10.25
8.15
The riskfree rate in Castilla, the country of residence of Rocinante, is currently 10% (in annual
terms). The puts and the calls are all on one unit of gold, namely one kilogram (2.205 pounds).
1.
(*)
Rocinante is wondering whether to put his savings, hardearned through multiple danger
ous adventures in the Iberian peninsula, in one of the following two trading strategies:
(a) Buy a call (with strike of $110) and invest $100 in the riskfree asset (for each call bought).
(b) Buy gold and a put (with strike of $110) in equal amounts (i.e. one kilogram of gold for
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 Fall '10
 Staff
 Derivatives, Derivative, Arbitrage, Options, Rocinante

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