a) Consider the prices of following American call options with different maturities and strike prices. Assume the current stock price is $30 and no dividends will be paid prior to the July expiration date. The risk-free interest rate is 5% and it is expected to remain constant over the next 2 years.

It is currently 3-month away from the maturity date of January call options.

i) Find three mispricings, explain what arbitrage restriction on call prices is being violated. For each of them, explain how you could take advantage of these mispricings and numerically illustrate how your designed strategy leads to an arbitrage profit(s). (10 marks)

ii) What further information would you need to know if you would like to pin down the source of the mispricing? Explain why you do not need this information in identifying the arbitrage opportunities in i). (3 marks)

April 10.50 Strike price January 20 10.25 25 4.90 35 0.26 July 10.77 7.85 5.90 0.77 1.28 April 10.50 Strike price January 20 10.25 25 4.90 35 0.26 July 10.77 7.85 5.90 0.77 1.28