Near market closing time on a given day, Mike has lost access to stock prices, but some

European call and put prices for a stock are available as follows:

Strike Price Call Price Put Price

$40 $11 $3

$50 $6 $8

$55 $3 $11

All six options have the same expiration date. After reviewing the information above, Mike

tells Ann and Leon that no arbitrage opportunities can arise from these prices.

Ann disagrees with Mike. She argues that one could use the following portfolio to obtain

arbitrage profit: Long one call option with strike price 40; short three call options with strike

price 50; lend $1; and long two calls with strike price 55.

Leon also disagrees with Mike. He claims that the following portfolio, which is different from

Ann's, can produce arbitrage profit: Long 2 calls and short 2 puts with strike price 55; long 1 call and short 1 put with strike price 40; lend $2; and short 3 calls and long 3 puts with strike price 50.

Required

Do you agree with Ann and Leon? Demonstrate the arbitrage opportunities if any in Ann's and Leon's portfolios.