Arbitrage and Derivatives

Construct an arbitrage example involving an asset that can be sold short and use it to explain the cost of carry model for pricing futures.
Why do higher interest rates lead to higher call option prices but lower put option prices?
Suppose a European put price exceeds the value predicted by put–call parity. How could an investor profit? Demonstrate that your strategy is correct by constructing a payoff table showing the outcomes at expiration.
Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of-the-money.

Sample Solution

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