+x

 

tamckenzie - 7/29/2008 11:55:43 AM

For part B, if the put has a price of $5, then

c + PV(X) = p + s  =>  c = $3.57

So, would we prefer either the put (since 6.43 > 5.00) or the call (since 5.00 > 3.57)?  I'm a bit confused.

[NEAS: Use the following logic.

If the call is truly worth $5, the put is worth $Z. If it is selling for $5, it is either overpriced or underpriced. We should buy under-priced securities and sell over-priced securities.

If the put is truly worth $5, the call is worth $Z. If it is selling for $5, it is either overpriced or underpriced. We should buy under-priced securities and sell over-priced securities.

Substitute the figures. The result: we should buy one of the options and sell the other option.]