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Question: You are looking at option prices on calls and puts and noticed that Biogen Idec (BIIB) is currently selling at $319.55. You look up the price of a call and a put with a strike price of $300 and maturing in 6 months. The price of the call is $40.80 and the put is $19.25. Assume BIIB does not pay a dividend. You also noticed the risk free rate is 2% per annum with continuous compounding for the next six months. If there is a mispricing, generate an arbitrage that will allow you to exploit this mispricing. What do you long and what do you short? How much money will you make by just entering into the arbitrage buying/selling one share of the securities you need to exploit the mispricing?

a. Assume these are European options.

b. Assume these are American options.

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Category:- Basic Finance
Reference No.:- M92765204

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