Question consider the following two callsbull both calls, Ask an Expert

Finance

Question: Consider the following two calls:

• Both calls are written on shares of ABC Corp. whose current share price is $100. ABC does not pay any dividends.

• Both calls have one year to maturity.

• One call has X1 = 90 and has price of 30; the second call has X2 = 100 and has price of 20.

• The riskless, continuously compounded interest rate is 10%.

By designing a spread (i.e., buying one call and writing another) position, show that the difference between the two call prices is too large and that a riskless arbitrage exists.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92262543

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