Question: Suppose S 0 = 4 , S 1 ( H ) = 8 , S 1 ( T ) = 2 and the risk -

Suppose S0=4,S1(H)=8,S1(T)=2 and the risk-free interest rate
is r=0. Someone is willing to buy or sell European Call options with
strike price k=10 for the price V0=2. Explain why there exists an
arbitrage opportunity; ie construct a portfolio which starts with nothing,
has a positive chance of earning money and zero probability of losing money.
Solution
Suppose S0=4,S1(H)=8,S1(T)=2 and the risk-free interest rate is r=0. Someone is

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