Question

1. Find the 2 different arbitrage opportunities in this table. Explain why these are arbitrage opportunities.   Explain (no need for a table) how to capture the profit on these opportunities.

	Premiums
Exercise Price	Calls	Puts	T	risk free rate
150	5.5799	2.8909	0.0822	5.00%
155	3.4278	5.0017	0.0822	5.00%
160	1.2445	10.1298	0.0822	5.00%
Stock price	155	American Options

SHOW YOUR WORK FOR ANY CALCULATIONS. Please clearly explain the answer.  

Answer 1

Liquidity of the market affects the price of the security to a greater extent. Research had interpreted that there is a stronger link between the systematic risks of liquidity in pricing the security in the market.

It states the value of the position to be protected through the use of hedging strategy in the position.

Investors had to determine that the worth it would consider being forfeited on an upside basis. The selling of the call option would be able to minimize the cost of hedging and simultaneously limits the gain. Also, future contracts sold would limit the return.

Further, the call option would be exercised only when the stock price is more than strike price considering the upside betting while the put option would be exercised only when strike price is more than stock price stating the downside betting.

Working: -

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