Today is t = 0. You are given the following data — 6-month zero coupon bond priced — 9-month — Call option European week Treasury bill with maturity 6-months and strike price

(a) Are the securities priced correctly?

(b) Assume that someone tells you that she is 100% sure that the call option is priced correctly. Can you design a strategy to take advantage of the arbitrage opportunity, if there is one?

SOLUTION

(a) The securities are not correctly priced, as the put-call parity is violated:

(b) Strategy long call, short put, short forward gives a positive cash-flow of $0.3480 at no risk.