Question: The European call options on the same non-dividend paying stock: Option price, exercise price, and time until maturity are given as follows Option Price Exercise

The European call options on the same non-dividend paying stock: Option price, exercise price, and time until maturity are given as follows

Option Price Exercise Price Maturity

Option A 8.00 50.00 1 yr

Option B 7.70 52.00 1.5 yrs

Option C 7.50 53.00 2.0 yrs

An arbitrageur realizes an arbitrage opportunity and consequently purchases or writes exactly one of Option B at time 0. Afterward, the actual stock prices arise as indicated in the table below:

Time Stock Price

1 yr 50.00

1.5 yrs 52.50

2.0 yrs 52.50

The continuously compounded risk-free rate of return is 6%. Arbitrage prots are accumulated at the risk-free rate of return. Determine the value of the arbitrage prots at the end of 2 years,

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