Consider the following exotic option whose payoff at maturity is given by the square root of the stock price less the strike price if it has a positive value, zero otherwise max S(1) K,0 Assuming that the strike price K is $7, determine the value of this exotic option under the assumption of no arbitrage If the market price of the call is $0 10, how would you trade to exploit this arbitrage opportunity

Question: Consider the following exotic option whose payoff at maturity is given by the square root of the stock price less the strike price if it

Consider the following exotic option whose payoff at is given by the square root of the stock price less the if it has a positive value, zero otherwise:
max[ S(1) − K,0].
Assuming that the K is $7, determine the value of this exotic option under the assumption of no- arbitrage. If the market price of the call is $0.10, how would you trade to exploit this arbitrage opportunity?

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