In each case identify the arbitrage and demonstrate how you would make money by creating a table showing your payoff.
a. Consider two European options on the same stock with the same time to expiration. The 90-strike call costs $10 and the 95-strike call costs $4.
b. Now suppose these options have 2 years to expiration and the continuously compounded interest rate is 10%. The 90-strike call costs $10 and the 95 strike call costs $5.25. Show again that there is an arbitrage opportunity.
c. Suppose that a 90-strike European call sells for $15, a 100-strike call sells for $10, and a 105-strike call sells for $6. Show how you could use an asymmetric butterfly to profit from this arbitrage opportunity.

  • CreatedAugust 12, 2015
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