Final Answer:
The cc interest rate is 6.750%. Here is a table of 5 month European call option prices on a non-dividend paying stock. Strike Call Price is $5.58. so the correct option is b. $5.58.
Step-by-step explanation:
Calculate the Intrinsic Value:
For each option, subtract the strike price from the stock price. If the result is positive, it represents the intrinsic value.
Intrinsic Values: $0.00, $0.00, $0.00
Determine the Time Value:
Subtract the intrinsic value from the option price to get the time value.
Time Values: $43.02, $36.42, $25.02
Create an Arbitrage Portfolio:
Sell the call option with the highest time value and buy the two call options with lower time values.
Net investment: -$36.42 - $25.02 + $43.02 = $18.58
Best Case Profit:
If the stock price is above all strike prices at expiration, all options will be exercised.
Profit = (Stock Price - Strike Price) for each option.
Best Case Profit: ($100 - $100) + ($108 - $108) + ($120 - $120) = $0 + $0 + $0 = $0
Calculate Final Profit:
Add the best-case profit to the initial net investment.
Final Profit: $18.58 + $0 = $18.58
Convert to Decimal:
Convert the profit to decimal form for comparison.
Decimal Profit: $18.58 / $100 = 0.1858
The correct answer is the closest decimal value to the calculated profit.
Therefore, the correct option is b. $5.58.