Calculate the expected profit

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We observe the following call options and exercise prices. They are all written on the same stock with the same time to maturity.

Options

Exercise Price

Call Value

1

62

10.89

2

63

8.91

3

68

4.41

4

72

0.45

A. Suppose you only have access to options 1, 2 and 3. Is there an arbitrage opportunity among all three options? If yes, please suggest a trading strategy and calculate the expected profit.

B. Suppose you only have access to two of the first three options at a time. Is there an arbitrage opportunity? Assume that the time to maturity is 1.15 years and that the continuously compounded interest rate is 2.85% p.a.

C. Suppose you only have access to options 2, 3 and 4. Is there an arbitrage opportunity among the three options? If yes, please suggest a trading strategy and calculate the expected profit.

Reference no: EM133069401

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