1. Find the 2 different arbitrage opportunities in this table. Explain why these are arbitrage opportunities. Explain (no need for a table) how to capture the profit on these opportunities.

	Premiums
Exercise Price	Calls	Puts	T	risk free rate
150	5.5799	2.8909	0.0822	5.00%
155	3.4278	5.0017	0.0822	5.00%
160	1.2445	10.1298	0.0822	5.00%
Stock price	155	American Options

I have added pictures of a similar example problem if it helps. SHOW YOUR WORK and ANY CALCULATIONS. I want an answer to number 1. Please Show work like an example problem using those formulas.

should An American call be exercised early? American calls versus European calls - Assuming in money Ca (So,T,x) = C(SoT,x) * If eserised early the Minimum call price you receive So-X is So-X (Hr)? Because American calls have an option to exercise early Thus, an American call has the SAME lower bound as a European call. Carso, T,x) 2 max [o, so-X (1+x)=> ] thus, the stock does Not Pay Alurrys better to sell TABLE 3.6 LOWER BOUNDS OF DCRB CALLS EXPIRATION the market it dividends MAY JULY 6.8738 EXERCISE PRICE JUNE 120 60428 6.4520 125 1.0171 1.4733 130 0.0000 0.0000 Note: Risk free rates are 4.57% (May). 4.56% (June) and 4635 (July): times (May), 0.0959 (June), and 0.1726 (July). If the stock does pay diudends 1.9127 0.0000 ( In the money ney) expiration are 00192 of If eterised early & So-x Min Call y So-X(1+r) So-D-X(146) price Thus, May (X=120) Lower Bound = MAX [0, 105,94 - 100 (17.0457) ione] = 6.0428 happens imagine just one danced that in the next instant * It is now possible that the price of call would exceed the price of an European call An American Effect of Interest Rates calls Minimum value of a put tr d lower bound A put holder will never exercise if their wealth will be decreased thus Thus, I call price (directly relater) P(So,T,x) zo and vice versa An American option can be exercised early so, Ellect of stock volatility Pa (So,T,x) = max co, x-so) = q call price Time value = Intrinsic Talne of a put a volatility (o) Example July 125 ACRB Call If by Ido 130 30, 140 Parso,T,x) - max(0, X-so] On table 3.1 1) / o What is the intrinsic value for the June 130 Put? o What is the time value for the June 130 Put? IV 5 15 1 1 so zlas.gy Prem, um = 14,25 1 IV: MAX (7) If ** [0, 130 -125,94] - 4,06 St = 100, 120 1 .130,150 time valve 14,25 4,06 10.19 IV = o, o,5,25 ] thus, the stock does Not Pay Alurrys better to sell TABLE 3.6 LOWER BOUNDS OF DCRB CALLS EXPIRATION the market it dividends MAY JULY 6.8738 EXERCISE PRICE JUNE 120 60428 6.4520 125 1.0171 1.4733 130 0.0000 0.0000 Note: Risk free rates are 4.57% (May). 4.56% (June) and 4635 (July): times (May), 0.0959 (June), and 0.1726 (July). If the stock does pay diudends 1.9127 0.0000 ( In the money ney) expiration are 00192 of If eterised early & So-x Min Call y So-X(1+r) So-D-X(146) price Thus, May (X=120) Lower Bound = MAX [0, 105,94 - 100 (17.0457) ione] = 6.0428 happens imagine just one danced that in the next instant * It is now possible that the price of call would exceed the price of an European call An American Effect of Interest Rates calls Minimum value of a put tr d lower bound A put holder will never exercise if their wealth will be decreased thus Thus, I call price (directly relater) P(So,T,x) zo and vice versa An American option can be exercised early so, Ellect of stock volatility Pa (So,T,x) = max co, x-so) = q call price Time value = Intrinsic Talne of a put a volatility (o) Example July 125 ACRB Call If by Ido 130 30, 140 Parso,T,x) - max(0, X-so] On table 3.1 1) / o What is the intrinsic value for the June 130 Put? o What is the time value for the June 130 Put? IV 5 15 1 1 so zlas.gy Prem, um = 14,25 1 IV: MAX (7) If ** [0, 130 -125,94] - 4,06 St = 100, 120 1 .130,150 time valve 14,25 4,06 10.19 IV = o, o,5,25