4. Explain what an arbitrageur would do in the following cases and how the arbitrage strategy...

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4. Explain what an arbitrageur would do in the following cases and how the arbitrage strategy would have no liabilities at expiration or when it is closed: a. The price of an ABC 40 call, expiring at the end of 6 months, is trading at $1.05, ABC stock is at $40, and the annual rate on a risk-free security is 6%. A call boundary condition is: Co > Max [So - PV(X),0] b. A September ABC 40 European call is trading at $3, and a September ABC 50 European call is trading at $4. Cash Flow at Expiration Position ST < $40 $40≤ ST≤ $50 ST > $50 4. Explain what an arbitrageur would do in the following cases and how the arbitrage strategy would have no liabilities at expiration or when it is closed: a. The price of an ABC 40 call, expiring at the end of 6 months, is trading at $1.05, ABC stock is at $40, and the annual rate on a risk-free security is 6%. A call boundary condition is: Co > Max [So - PV(X),0] b. A September ABC 40 European call is trading at $3, and a September ABC 50 European call is trading at $4. Cash Flow at Expiration Position ST < $40 $40≤ ST≤ $50 ST > $50

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a In this case an arbitrageur would take advantage of the mispricing in the ABC 40 call options The ... View the full answer