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Question 2 Note that Part C are not related to Part A or B. Part C: 4 marks Consider the following put option contracts: Strike
Question 2 Note that Part C are not related to Part A or B. Part C: 4 marks Consider the following put option contracts: Strike Price Put option premium $50 $7 $55 $10.75 $60 $14.45 Required: Show an arbitrage opportunity by completing the table below. Note that the first transaction has been identified for you. That is, buy one put option with strike price of $50, which will cost $7 today. You are supposed to identify transactions (2) and (3), fill in the rest of the tables and show an arbitrage opportunity. Transaction t = 0 ST 60 (1) Buy one 50 Strike put $7 ? ? ? ? (2) Sell...? ? ? ? ? ? (3) Buy..? ? ? ? ? ? Net payoff ? ? ? ? ? Also note that your arbitrage strategy should only trade the three put options given in the above table, i.e. no need to consider/include bonds, shares or any other financial securities
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