Question: Let S = $100,K = $95, r = 8%, T = 0.5, and = 0. Let u = 1.3, d = 0.8, and n

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 observe a call price of $15.50. What is the arbitrage?

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