(Answered) Consider european stock options with an exercise price of

Management Studies

Consider European stock options with an exercise price of $40 that expire in 3 months. Assume the underlying stock pays no dividends, is trading at $40, and has a volatility of 20% per annum, and that the risk-free rate is 3% per annum. Currently the call price is $1.74 and the put price is $1.30. Construct an arbitrage portfolio and show how much profit can be made.

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