Problem

27. ABC stock is currently trading at 100. There are three-month American options on ABC s...

27. ABC stock is currently trading at 100. There are three-month American options on ABC stock with strike prices 90, 100, and 110. The risk-free interest rate is 12% for all maturities in continuously compounded terms. Which of the following sets of prices offers an arbitrage opportunity? How can the opportunity be exploited?

(a) The 90 call is selling for 10 1/4.

(b) The 90 put is at 4, and the 100 put is at 3.

(c) The 100 call is at 12, and the 110 call is at 1.

(d) The 90 call is 13, the 100 call is 8, and the 110 call is 1.

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Solutions For Problems in Chapter 9