Question: Let S = $40, K = $50, r = 8% ( continuously compounded), T = 0.25, 8 = 0. Let u = 1.3, d =

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Let S = $40, K = $50, r = 8% ( continuously

Let S = $40, K = $50, r = 8% (continuously compounded), T = 0.25, 8 = 0. Let u = 1.3, d = 0.7, and n= 1. Suppose you observe that the price of a European call option is $0.88. In this situation, an arbitrageur would simultaneously... Selected Xb. Answer: buy the call, buy 0.0833 shares of the stock, and borrow $2.2871. Answers: a. sell the call, buy 0.0833 shares of the stock, and borrow $2.2871. b. buy the call, buy 0.0833 shares of the stock, and borrow $2.2871. C. sell the call, sell 0.0833 shares of the stock, and lend $2.2871. d. buy the call, sell 0.0833 shares of the stock, and lend $2.2871

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