Suppose $S_0=4,S_1(H)=8,S_1(T)=2$ and the risk$-$free interest rate

is $r=0.$ Someone is willing to buy or sell European Call options with

strike price $k=10$ for the price $V_0=2.$ Explain why there exists an

arbitrage opportunity; ie construct a portfolio which starts with nothing,

has a positive chance of earning money and zero probability of losing money.

Solution