Answered

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If a General Electric January 20 call option with a strike price of $45 were about to expire and the market price of the underlying GE stock was $51.17, the price of the call option would have to be __________ to eliminate arbitrage opportunities.

Sagot :

Parrain

Answer: $51.17

Explanation:

A call option gives the holder the right but not the obligation to buy a stock. They are usually exercised when the underlying stock has a higher price than the price that the call option allows them to buy the underlying stock for. This is called the strike price.

As the option is about to expire here, it should be trading at the same price as the underlying stock or else an arbitrageur could take advantage of it by buying the call option which would enable them to get the stock at $45 when the option expires. They can then sell the stock for $51.17 and make a profit of:

= 51.17 - 45 = $6.17

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