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Sagot :
Answer:
Using the Put-Call parity principle where the following relationship holds:
Covered Call = Protective Put
Using the above, find the call price:
Call + Strike price / (1 + risk free rate) = Stock price + Put
Call + 18 / (1.08) = 20 + 3.33
Call + 16.67 = 20 + 3.33
Call = 23.33 - 16.67
Call = $6.66
The call option is overvalued at $7 so sell the Call option and buy the Put option and the Stock and borrow $16.67 which is the present value of the Put.
The net gain will be:
= 7 - 6.66
= $0.34
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