..000 Verizon 10:40 PMM una.instructure.com Question1 UNA You note that the market includes securities A and B whose prices in one-year depend only on own whether the market is up." "steady," or "neutral. A, which has a current share price of $25, will sell for $32, $25, or $22 (respectively). while B currently at $14, will sell for $16, $14, or $12. Explain an arbitrage strategy, assuming there are no costs associated with trading A and B. 28 Question2 You have three options, all with identical prices. The price of the first will increase by 10% if the market goes up, and decrease by 10% if the market goes down. The second will increase by 20% (market up) and down by 15% (market down), and the third will increase by 16% and decrease by 20% (again, depending on the market) Describe an arbitrage strategy. Question3 You wish to purchase a European call option with expiration in one year and strike price $6,840. The underlier is 100 shares with current price $67.90. The annual effective interest rate is 4.2%. The price of the European put option (same expiration and strike price) is $32.17. How much should you expect to pay for the call option, assuming that pricing is by a no- arbitrage model? Question 4 A stock sells for $23.80 per share. Three months from now, the price will either be $25.20 or $22.20. A call option to purchase 100 shares in three months for $24 sells for $72. With what risk-free annual effective rate of interest is this consistent (assuming no-arbitrage model)? Question 5 The current price of a stock is $47.20. One month from now, the price will either be $48 or $46.50. The nominal risk-free interest rate is 3% convertible monthly. In order that there not be an arbitrage opportunity, what should the price of the European put option for 100 shares of this stock, if it allows the holder to purchase the stock for $47 per share in one month