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3. (20 points) Arbitrage Detection for Mispriced Options Suppose a non-dividend paying stock is currently priced at S = 40.00. Furthermore, suppose that r=0.00% and
3. (20 points) Arbitrage Detection for Mispriced Options Suppose a non-dividend paying stock is currently priced at S = 40.00. Furthermore, suppose that r=0.00% and that otherwise identical European-style puts and calls are available at strike prices K_ = 35.00, K = 40.00 and K7 = 45.00 In each of the following examples, identify a comparative option pricing law that has been violated. List the transactions required to create an arbitrage. (Please note that in each example, multiple laws are violated. You only need to identify one violation and create an arbitrage based on that violation.) a) S K P 40.00 35.00 10.00 2.00 40.00 40.00 4.00 4.00 40.00 45.00 2.00 7.00 Violation: Arbitrage Transactions: b) S K P. 40.00 35.00 7.00 2.00 40.00 40.00 5.00 5.00 40.00 45.00 2.00 7.00 Violation: Arbitrage Transactions: 3. (20 points) Arbitrage Detection for Mispriced Options (continued) S K c P 40.00 35.00 7.00 7.00 40.00 40.00 4.00 4.00 40.00 45.00 2.00 2.00 Violation: Arbitrage Transactions: d) S K P 40.00 35.00 7.00 2.00 40.00 40.00 4.00 4.00 40.00 45.00 2.00 8.00 Violation: Arbitrage Transactions
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