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We consider a European right to sell to expire in 4 months. The right is written...

We consider a European right to sell to expire in 4 months. The right is written in a share that does not pay a dividend, the current price of which is 64 euros. It is given that the exercise price is 60 euros and the interest rate without risk is 12% (on an annual basis). Examine if there is an arbitrage opportunity and if there is to show in detail the steps required to achieve it.

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Answer #1

To get the arbitrage profit we have to sell the option and short sell the stock also . Amount realized from te

He short selling will be invested at 12% per Annum

Amount realized= 64*1.04 = 66.56

After the period we will purchase the share at 60 from whom we have given right to sell at 60

We will have arbitrage gain of 6.56

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