Problem:
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%:
|
Exercise Price
|
Put Price
|
Call Price
|
|
50
|
$1.50
|
$5.75
|
|
55
|
$3.25
|
---
|
Required:
Question 1: What should the price be of a call option that expires 6 month from today with an exercise price of $55?
Question 2: What is the value of a synthetic stock created with put and call options that expire in 6 months with an expiration price of $50?
Question 3: Is there any arbitrage opportunity? If there is, how to create the position?
Note: Provide support for your underlying principle.