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The following pricing information presents an arbitraging opportunity. A non-dividend-paying stock is currently trading at $85 per share; A European call option on one share
The following pricing information presents an arbitraging opportunity.
- A non-dividend-paying stock is currently trading at $85 per share;
- A European call option on one share of this stock has a strike price of $70 and is trading at $18. It expires in 1 year.
- You may borrow or lend at risk-free rate of 8% per year.
Round your calculations to the nearest $0.01.
1) Explain in details what positions one should create to take advantage of this opportunity.
2) Calculate the size of profits to be made from such a strategy. Show your work to earn the full score.
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