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You have constructed a synthetic caplet's value which is V(0) = 0.0547998448. However, the traded caplet in the market has a price of P =

You have constructed a synthetic caplet's value which is V(0) = 0.0547998448. However, the traded caplet in the market has a price of P = 0.004.

a) What simple trading strategy would capture the arbitrage profits?

b) What is the maximum profit you can generate today & what are the cash flows at Time 1 in either Up or Down States?

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