Consider the following two calls: Both calls are written on shares of ABC Corp. whose current
Question:
Consider the following two calls:
• Both calls are written on shares of ABC Corp. whose current share price is $100. ABC does not pay any dividends.
• Both calls have one year to maturity.
• One call has X1 = 90 and has price of 30; the second call has X2 = 100 and has price of 20.
• The riskless, continuously compounded interest rate is 10%. By designing a spread (i.e., buying one call and writing another) position, show that the difference between the two call prices is too large and that a riskless arbitrage exists.
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We can create a riskless arbitrage by buying one call with X1 90 and p...View the full answer
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