# Question

Suppose call and put prices are given by

What no-arbitrage property is violated? What spread positionwould you use to effect arbitrage? Demonstrate that the spread position is an arbitrage.

What no-arbitrage property is violated? What spread positionwould you use to effect arbitrage? Demonstrate that the spread position is an arbitrage.

## Answer to relevant Questions

Suppose call and put prices are given by What no-arbitrage property is violated? What spread positionwould you use to effect arbitrage? Demonstrate that the spread position is an arbitrage. Repeat the previous problem assuming that the stock pays a continuous dividend of 8% per year (continuously compounded). Calculate the prices of the American and European puts and calls. Which options are early-exercised? Let S = $100,K = $95, r = 8%, T = 0.5, and δ = 0. Let u = 1.3, d = 0.8, and n = 1. a. Verify that the price of a European call is $16.196. b. Suppose you observe a call price of $17. What is the arbitrage? c. Suppose you ...Let S = $100, K = $95, σ = 30%, r = 8%, T = 1, and δ = 0. Let u = 1.3, d = 0.8, and n = 2. Construct the binomial tree for a call option. At each node provide the premium, ∆ and B. We saw in Section 10.1 that the undiscounted risk-neutral expected stock price equals the forward price. We will verify this using the binomial tree in Figure 11.4. a. Using S = $100, r = 0.08, and δ = 0, what are the ...Post your question

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