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Exercise 1.4. One day, Alice and Bob observe the following option prices (assume no bid-ask spread and r = 0): 95C@6.30, 105C03.10. 110C@ 1.00. Alice
Exercise 1.4. One day, Alice and Bob observe the following option prices (assume no bid-ask spread and r = 0): 95C@6.30, 105C03.10. 110C@ 1.00. Alice says that one can make sone guaranteed profit by buying one 95C, selling three 105C and buying two 110C. But Bob says he read that writing (seling) call options exposes one to the risk of unlimited loss. Draw the PNL diagram for the spread suggested by Alice to see who is correct
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