Suppose S = $98, K = $100, u = 1.08, d = 0.94 a one period put option with delta of -0.10000 should sell for $1.41 but it selling in the market for $1.47. this leads to an arbitrage opportunity that can be accomplished by selling 0.10000 units of stocks invested at $80.00 for one period at the rate of 1.04 and selling the put. Does this lead to arbitrage profits?

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To determine whether this leads to arbitrage profits we can construct a portfolio with the following ... View the full answer