Question: Prove Proposition 6. Then solve the following problem: Three puts on shares of XYZ with the same expiration date are selling at the following prices:

Prove Proposition 6. Then solve the following problem: Three puts on shares of XYZ with the same expiration date are selling at the following prices:

Exercise price 40: 6

Exercise price 50: 4

Exercise price 60: 1

Show an arbitrage strategy which allows you to profit from these prices and prove that it works.

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Proposition 6 states that If the prices of puts with the same expiration date are not in equilibrium then an arbitrage opportunity exists To prove thi... View full answer

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