Answer:
$0.745
Explanation:
GIven that
Current stock price [tex]S_o[/tex] = $40
strike price X = $50
time to expiry of option = 3 - month
put price option [tex]P _o[/tex] = $11
call price option [tex]C_o[/tex] = $1
and the risk-free rate r = 6%
The amount that can be made on the arbitrage can be evaluated as a function of the Put-call parity.
i.e For parity ;
[tex]C_o + (X \times e^{-rt} ) = P_o + S_o[/tex]
[tex]1 + (50 \times e^{-(0.06 \times 0.25} ) = 11 + 40[/tex]
[tex]1 + (50 \times 0.9851 ) = 51[/tex]
[tex]1 + (49.255 ) = 51[/tex]
50.255 = 51
the difference in both values above illustrates that there is no parity taking place and the arbitrage estimation here = 51 - 50.255 = $0.745
