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 risk-free 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, hard-earned 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 risk-free 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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This note was uploaded on 11/25/2011 for the course BUSI 588 taught by Professor Staff during the Fall '10 term at UNC.