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The current stock price is $65 and it will pay $3 dividends in 1 month and 4 months. A European at-the-money put option with 5
The current stock price is $65 and it will pay $3 dividends in 1 month and 4 months. A European at-the-money put option with 5 months to maturity is traded for $6.A European at-the-money call option with 5 months to maturity is $5. The spot rate for 1, 4, 5 months are 13%,11% and9.5%(c.c).
1.Is there an arbitrage opportunity? If yes describe the investment strategy that pays off today and has for sure zero cash flows at any time in the future.
2.What level in the interest rate ensures that markets are arbitrage free?
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