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The price of a non-dividend-paying stock is $100 and the continuously compounded risk-free rate is 5%. A

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The price of a non-dividend-paying stock is $100 and the continuously compounded risk-free rate is 5%. A 1-year European call option with a strike price of $100 × e0.05×1= $105.127 has a premium of $11.924. A 11 2 year European call option with a strike price of $100 × e0.05×1.5 = $107.788 has a premium of $11.50. Demonstrate an arbitrage. Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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We demonstrate that these prices permit an arbitrage We buy the cheap option the longer lived oneand...View the full answer


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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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