There is a European and an American put on the same non-dividend paying stock today.

Both put options have the same strike price of 5,000 and the same expiration date of

October 28, 2021. The European put is currently trading at 100 and the American put

at 80. (a) Is there an arbitrage opportunity?

(b) If there is one, how would you take advantage of it?

(c) Explain your positions/transactions on all appropriate dates and compute your

arbitrage profit. If there is no arbitrage opportunity, explain why. Note, do not forget the

possibility of the American put being exercised early prior to expiration.

Answer rating: 100% (QA)

To determine if there is an arbitrage opportunity we need to compare the prices of the European and ... View the full answer