Question: 6. In a one-period binomial model with S (0) 4, u consider a European call option with strike price K = 5. 2, d =

6. In a one-period binomial model with S (0) 4, u consider a European call option with strike price K = 5. 2, d = 0.5 , r 0.25 itge ii) Show that if the price of the option is 1.21 an investor can set up a portfolio to profit from this arbitrage situation. ii) Show that if the price of the option is 1.19 an investor can set up a portfolio to profit from this arbitrage. iv) What is the no-arbitrage condition? Calculate the profit if the investor buys the stock and the stock price goes up. 6. In a one-period binomial model with S (0) 4, u consider a European call option with strike price K = 5. 2, d = 0.5 , r 0.25 itge ii) Show that if the price of the option is 1.21 an investor can set up a portfolio to profit from this arbitrage situation. ii) Show that if the price of the option is 1.19 an investor can set up a portfolio to profit from this arbitrage. iv) What is the no-arbitrage condition? Calculate the profit if the investor buys the stock and the stock price goes up

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