Then use the put call parity equation to figure out if there is an arbitrage opportunity. (There is, but Im sure you can work that bit out for yourself....!) Its a good question because it looks at your knowledge of both Futures and Options within the 1 question.
Well
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A one year European put option and a one year European call option with a strike price of $59 are both priced at $5 in the market. The one year Futures price is currently traded at $58. The risk free rate is 7% p.a. Is there an arbitrage opportunity, if so, show the gain on the arbitrage.
I'm confused and I'm not sure what to do. Do I use put call parity? If so, how am I supposed to go about with it? Any help would be appreciated and I'll vote for best answer! Thank you!
