Question: Options listed for Krispy Kreme were used in the text as an example of option price estimation using implicit variance. The implicit variance from the

Options listed for Krispy Kreme were used in the text as an example of option price estimation using implicit variance. The implicit variance from the August 35 option resulted in estimated call prices lower than actual call prices for the August 45 option. Assuming the Black-Scholes OPM is correct, and that all assumptions of the model are met in the marketplace: What hedge (i.e., riskless) portfolio can be formed to make arbitrage profits with Krispy Kreme August 45 options?

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The BlackScholes model estimated the price of the August 45s options to be 009 while the actual mark... View full answer

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