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A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the
- A European call that will expire in one year is currently trading for $3. Assume the risk-free rate (based on continuous compounding) is 5%, the underlying stock price is $60 and the strike price is $55.
- Is there an arbitrage opportunity?
- Describe exactly what a trader should do to take advantage of the arbitrage opportunity assuming it exists.
- Determine the present value of the profit that the trader can earn assuming you identify an arbitrage opportunity.
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