You are given the following: Price of the stock ................................... $26 Price of a six-month call at
Question:
Price of the stock ................................... $26
Price of a six-month call at $25 ................... 2
Price of a six-month call at $30 ................... 4
An investor buys the $25 call and sells the $30 call. What are the profits if the stock's price at expiration is $20, $25, $30, or $35? Arbitrage implies what about the price of the call with the higher strike price?
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This problem is another arbitrage problem and illustrates why the call with the lower strike pric...View the full answer
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