Could you help giving me explanation on this problem Imagine you are a trader at a large investment bank and that there is a stock traded today on the stock market at a price of $100 which will be worth tomorrow either $120 or $80 You have the information from a reliable source that tomorrow's price of the stock will increase to $120 with a probability of 80 and decrease to $80 with a probability of 20 Another trader who works for a competitor is calling you and offers you to buy a put option from her on that stock for $3 maturing tomorrow with a strike price of $100 What do you do Can you make money without any capital requirement and without any risk Provide an explanation for your answer and assume for simplicity that the risk free interest rateris equal to zero

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Question: Could you help giving me explanation on this problem ? Imagine you are a trader at a large investment bank and that there is a

Could you help giving me explanation on this problem ?

Imagine you are a trader at a large investment bank and that there is a stock traded today on the stock market at a price of $100 which will be worth tomorrow either $120 or $80.

You have the information from a reliable source that tomorrow's price of the stock will increase to $120 with a probability of 80% and decrease to $80 with a probability of 20%. Another trader who works for a competitor is calling you and offers you to buy a put option from her on that stock for $3 maturing tomorrow with a strike price of $100.
What do you do? Can you make money without any capital requirement and without any risk? Provide an explanation for your answer and assume for simplicity that the risk-free interest rateris equal to zero.

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