Question

QBV, a non-dividend-paying stock, is currently trading for $100 a share. There is a 25-percent chance that the stock will trade for $85 in one year, and a 75-percent chance that the price will increase to $135. The risk-free rate is 5 percent per year. All options expire in one year.
a. If the call option on QBV with a strike price of $115 is actually trading for $10, show that there is an arbitrage opportunity.
b. If the put option on QBV with a strike price of $98 is actually trading for $0.50, show that there is an arbitrage opportunity.



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  • CreatedFebruary 25, 2015
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