Question: PROBLEM hedging. 1. [10 points] (a) Explain the terms arbitrage opportunity, and (b) Explain why an American put option is always worth at least as

PROBLEM "hedging". 1. [10 points] (a) Explain the terms "arbitrage opportunity",

PROBLEM "hedging". 1. [10 points] (a) Explain the terms "arbitrage opportunity", and (b) Explain why an American put option is always worth at least as much as its intrinsic value (i.e. payoff function), that is P(S,t) > max (E S, 0) for all S > 0 and t

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