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A stock price is $50. The value of a European call option with a strike price of $47.50 and maturity of 100 days is $4.375.
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A stock price is $50. The value of a European call option with a strike price of $47.50 and maturity of 100 days is $4.375. The 100-day default-free discount rate is 5 percent, assuming a 360-day year.
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a) For a put option with a strike price of $47.50 and maturity of 100 days, you are quoted a
price of $2.125. Is this consistent with the absence of arbitrage? Please justify your answer.
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b) If your answer to a) is that arbitrage is possible, how would you construct an arbitrage
portfolio to take advantage of the situation?
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