a) You have been examining arbitrage opportunities with options. You have just found
the following information regarding European options written on Commonwealth
Bank of Australia shares. Using this information, discuss whether put-call parity
holds in this instance? If it doesn't, indicate what strategy you would implement on
taking advantage of any arbitrage opportunity and the profit you would earn from
your strategy (Note: You are required to provide a table outlining the initial and
terminal values of your strategy). (9 marks)
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A Commonwealth Bank of Australia shares is currently selling for $98.16 on the
ASX.
A 20-month European call option contract on Commonwealth Bank of
Australia shares with a strike price of $90 is priced at $6.50.
A 20-month European put option contract on Commonwealth Bank of
Australia shares with a strike price of $90 is priced at $0.25.
The risk-free rate of interest is 5.55% p.a.
b) After your excellent work on in part a) above, a client has asked you to advise them
on earning arbitrage profits with futures contracts. Given the following information,
advise the client on the mispricing of the following futures contract and how an
arbitrage strategy could be implemented. Be sure to draw a table outlining the initial
and terminal values of your strategy: (9 marks)
A share FAB is currently selling for $31.54 on the ASX;
A 7-month futures contract on FAB is traded with a futures price of $32.57 per
share;
The risk-free rate of interest is 5.8% p.a.; and,
Shares in FAB are currently paying a dividend yield of 3.8% p.a.