Question

Screen Shot 2020-02-17 at 5.05.17 AM of the textbook. Suppose call and put prices are given by the values in the table Strike price K Call price Put price 70 25 7 80 19 11 90 7 18 Determine if there are any arbitrage opportunities and, if so, explain a spread position that produces an arbitrage profit.

Answer 1

Let us assume market price on the date of sale of options is 110, as nothing is mentioned in question
	Case 1		Case 2		case 3
	Strike price=70		Strike price=80		Strike price=90
Total amount incurred on options	33		30		25
if we exercise, options
gain on call option(right to buy at strike price, which is lower than market price, hence we buy at K and sell in market for 110	40(110-70)		30(110-80)		20(110-90)
gain on put option( right to sell at strike price which is less than market price, hence we don’t exercise our right)	0		0		0
Total gain or (loss)	7(40-33)		0 (30-30)		5 loss(20-25)