Lorenzo Bretscher Derivatives Spring 2023

1. American call prices in $ on June 1st, 2001 for a chain on stock of TMK Inc. are reported in
the table below:
Strike ($) June July August September
110 8.88 12.50 15.00 18.00
120 1.50 3.75 3.00 4.25
130 1.00 2.25 2.88 5.00

The current stock price is 119.5$. Assume that the last trade for all of these option contracts
occurred at exactly the same time, and that TMK Inc. will not pay dividends until October
2001.

a) Identify three different pricing discrepancies in the table above and describe why the
prices violate no-arbitrage restrictions, and specify which restriction they violate.
b) Propose an arbitrage strategy to take advantage of each of the anomalies you identified
in point a).
c) You observe the September call and put European options on the same stock with 110$
strike are very liquid and traded contracts, and you conclude it is very unlikely that
they are traded at a price different from the no-arbitrage value. The aforementioned call
and put are quoted at 16$ and 5.15$ respectively. Compute the no-arbitrage price of a
September forward contract on the same stock.
d) Suppose the forward contract at point c) is quoted at 122$,and that you are not allowed to
borrow at all. Propose a trading strategy to take advantage of the arbitrage opportunity
in the market.