Question
A non-dividend paying stock trades at bid price $99 and ask price $100. A one year call option on the stock with strike $100 trades
A non-dividend paying stock trades at bid price $99 and ask price $100. A one year call option on the stock with strike $100 trades at bid price $8 and ask price $11. A one year put option on the stock with strike $100 trades at bid price $3 and ask price $6. Both put options and call options have contract size 1 stock per option. The continuously compounded risk free interest rate is 0% and bonds are available at all principal amounts and trade without bid-ask spreads. There are no other transaction costs and short selling is allowed. Identify the size of the immediate arbitrage profit you can lock in if you are allowed to trade (buy or sell) at most one unit of each asset.
a) $2 b) $1 c) $3 d) None of the alternatives e) $4 f) $5 g) $6
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