Arbitrage Research Paper Example | Topics and Well Written Essays - 250 words

Arbitrage - Research Paper Example In this case, the call price is $1.15 while the put price is $0.55. The stock price of the company does not pay any dividends. This shows that an arbitrage position does not exist for the firm. This is because the difference between the two prices is fairly small and the company already has the stocks at the exercise price (Chen, 2005). The time of expiry is only 60 days and the stocks can perform better than if they were sold for immediate profits by the company. It would therefore get a loss in the long term if arbitrage is exercised. The annual interest rate receivable by the company is a factor in calculating the value of the stock and given that it is 12% then the possibility of receiving prices above this when arbitrage is used is quite minimal. There are other costs that are involved when making a call such as the brokerage fees and taxes on capital gains, it is simpler to hold onto the shares and