Conversion arbitrage from a parity violation
At the $100 strike (1-year expiry) a European call trades at $8, the put at $4, and the stock at $100. The risk-free rate is 5% continuously compounded. Put-call parity is violated. How much riskless profit (per share, locked in today) can you capture? (in dollars, to 2 decimals)
Show hints (2)+
- Protective put () vs fiduciary call () - same payoff, so equal cost.
- Profit = the price gap between the two portfolios.
Answer
Reveal answer →Final answer
0.88 (± 0.02)
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