Business, 06.03.2020 22:34 glowbaby123

Consider two European call options with two different strike prices denoted by: K1 < K2. Both calls are on the same non dividend paying stock and for the same expiration date, T. Prove: At any time t, (t < T), the premiums on these calls satisfy the following inequality: c(K1) – c(K2) ? (K2 – K1)e–r(T – t)

Given that the annual risk-free rate is r = 4.52% and that the JUL time to expiration is 144 days, check numerically whether the result holds for the K1 = 30 and K2 = 35 JUL calls.

If the result does not hold, open a strategy that will create an arbitrage profit and, using a table of cash flows and P/L at JUL expiration, calculate the arbitrage profit per share.

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Consider two European call options with two different strike prices denoted by: K1 < K2. Both cal...

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