financial derivates, please consider the following hints and provide correct answer. Thanks. Hints:"You need to construct a portfolio that consists of Option #2 and the stock that provides at least as high payoff at expiration as Option #1. Importantly, this portfolio may have fractions of Option #2 and the stock. For example, 1/4 of Option #2 and 3/4 of the stock.
Consider two European call options on the stock of XYZ. Both options mature one year from now. The first option (Option #1) has a strike price of $40.0 and trades at $19.8 today; the second option (Option #2) has a strike price of $55.0. Currently, the stock price is equal to $55.4, and the one-year continuously-compounded risk-free rate is 3%. The stock does not pay dividends. Note that you will get partial credits for the problem and hints under the submission box. We've increased the number of attempts to 15, so don't give up! What is the lowest price of the second option (Option #2) consistent with absence of arbitrage? 5.24 Great job! You are one step away from the correct answer. But this is the most challenging step, so you will need to play with payoff graphs and think. You need to construct a portfolio that consists of Option #2 and the stock that provides at least as high payoff at expiration as Option #1. Importantly, this portfolio may have fractions of Option #2 and the stock. For example, 1/4 of Option #2 and 3/4 of the stock. We've increased the number of attempts in this question to 15 to let you experiment. Please round your answers to at least two digits. Consider two European call options on the stock of XYZ. Both options mature one year from now. The first option (Option #1) has a strike price of $40.0 and trades at $19.8 today; the second option (Option #2) has a strike price of $55.0. Currently, the stock price is equal to $55.4, and the one-year continuously-compounded risk-free rate is 3%. The stock does not pay dividends. Note that you will get partial credits for the problem and hints under the submission box. We've increased the number of attempts to 15, so don't give up! What is the lowest price of the second option (Option #2) consistent with absence of arbitrage? 5.24 Great job! You are one step away from the correct answer. But this is the most challenging step, so you will need to play with payoff graphs and think. You need to construct a portfolio that consists of Option #2 and the stock that provides at least as high payoff at expiration as Option #1. Importantly, this portfolio may have fractions of Option #2 and the stock. For example, 1/4 of Option #2 and 3/4 of the stock. We've increased the number of attempts in this question to 15 to let you experiment. Please round your answers to at least two digits
