Jim Couch works the option floor with his associate, Craig Holcombe. They are in the midst of a busy trading day and looking to exploit arbitrage opportunities in the market. Several potential opportunities for GTECH (GTK) stock are listed below: Table 1 Risk-free rate, annual basis = 4% Stock Current Price GTK $30.00 Option Price Strike Expiry Call 1.60 $30.00 60 days Call 0.50 $32.00 30 days Put 1.50 $30.00 60 days Put 0.10 $35.00 30 days Is there an arbitrage opportunity and how to explore it?
I think you have a typo in the strike prices…
using $32 for the strike… C+B = P+S .5 + [32/(1.04^(1/12))] = .1 + 30 32.40 does not equal 30.1 buy the put, sell the call. arb profit of $2.30
C+X=S+P C=30+1.5-30/(1.04)^60/365 C=30+1.5-29.804 C=1.69 Since the 60 day call is price at 1.6 instead of 1.69, you should go long 60 day calls at $30 and also go long the stock, the put and short the discount bond. Not positive though.
using the 60 day numbers (i used a 360 day basis), you go long the call and bond, short the put and stock to realise about 8-9c profit.
Yeah chrismaths is right about how to realize the arb.
chrismaths has got it you sell put and stock and receive 31.5 you need to buy a call for 1.6 and deposit/buy a bond for an amount returning 30$ in 60 days so 31.5 proceeds 1.6+29.80=31.4 cost profits of 0.1$ in 60 days? plus I dont think you can use the option where the exercise price is different than market prices am I correct?
yuck. i fubar’ed that one bad. lesson learned - no derivatives before coffee. ever.
If you are struggling: draw pay-off charts. They really help me visualise what is going on.
yeah those help. I actually get this stuff, I just misread some of the data, or transposed it wrong from the screen to my scratch pad, or something. I’m just an utter disaster this morning all around.
chrismaths, Once we figure out if there is an arb opportunity. We are either going to be buying (selling) the fidicuiary call and selling (buying) the protective put…right?
Tim Couch is employed?
You sell the expensive side of the equation and buy the cheap one.
Right. Good. Thanks for the help.
chrismaths, please assist… i don’t get what is wrong with budfox427’s answer…will u clarify please?
grace grace Wrote: ------------------------------------------------------- > chrismaths, > > please assist… i don’t get what is wrong with > budfox427’s answer…will u clarify please? I used the 2 options with different strike prices, which won’t work.
waaaaooooo!!! i did exactly what u did, thinking there was atypo in the question: so tenors & strike prices should match …