Two call options are written on the same stock that trades for $70 and both call options have the same exercise price of $85. Call 1 expires in 6 months and Call 2 expires in 3 months. Assume that Call 1 trades for $6 and that Call 2 trades for $7. Do these prices allow arbitrage? Analyse. If they do permit arbitrage, then explain the arbitrage transactions.

Answer rating: 100% (QA)

Call 1 expires in 6 months Call 2 expires in 3months Since the strike prices are same C... View the full answer