Question $4$

Question $4$

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Homework due Aug $6,202416$:$36$ CDT

Question $4$

$0\mathrm{.}0/20\mathrm{.}0$ points $($graded$)$

Consider two European call options on the stock of XYZ$.$ Both options mature one year from now. The first option $($Option #$1)$ has a strike price of $$20\mathrm{.}0$ and trades at $$21\mathrm{.}6$ today; the second option $($Option #$2)$ has a strike price of $$40\mathrm{.}0.$ Currently, the stock price is equal to $$40\mathrm{.}4,$ and the one$-$year continuously$-$compounded risk$-$free rate is $4\%.$ The stock does not pay dividends.

What is the lowest price of the second option $($Option #$2)$ consistent with absence of arbitrage?

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