A Call Option with 6 Months to Expiration Has a Strike

question 61

Essay

A call option with 6 months to expiration has a strike price of $30 and costs $2. A share
of the underlying stock is currently selling for $28.50. The annualized risk-free rate is
4%. If this option is fairly priced, what should the value of a put option with the same
strike price and expiration be? If it is currently selling for $4.00, how could you earn
arbitrage profits?

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Definitions:

Specific Performance

A legal remedy requiring a party to fulfill their obligations under a contract, rather than providing monetary compensation for failing to do so.

Contract Remedy

The legal means available to a party to enforce, redress, or protect their rights under a contract.

Rescission

The legal act of voiding a contract and returning the parties involved to their original positions, as if the contract had never been executed.

Parol Evidence Rule

This legal rule restricts the use of oral (parol) statements in court when interpreting a written contract.