Suppose call and put prices are given by: Strike 75 80 Call premium 7 8 Put premium 4 10
a) i) What no-arbitrage condition is violated by the call premiums?
ii) What spread position would you use to effect an arbitrage?
iii) Demonstrate that the spread position is an arbitrage; that is, show that a positive profit results no matter what stock price occurs.
b) ) i) What no-arbitrage condition is violated by the put premiums?
ii) What spread position would you use to effect an arbitrage?
iii) Demonstrate that the spread position is an arbitrage; that is, show that a positive profit results no matter what stock price occurs.