Calculate the minimum value of the call option

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Reference no: EM131952318

Financial Derivatives and Risk Management Homework -

Q1. Suppose the following information is given on a European-style call option on a stock that pays no dividend:

S₀ = 20

T = 1

K = 18

r = 10% (continuous compounding)

Please calculate the minimum value of the call option.

Q2. European call and put options with a strike price of $100 will expire in one year. The underlying stock is selling for $105 currently and makes no cash dividend payments during the life of the options. The risk-free rate is 5% (annual compounding). The put is selling for $3, and the call is selling for $15. Please answer the following questions:

(1) Is there an arbitrage opportunity? Please explain.

(2) If yes, please demonstrate how you should execute the arbitrage transaction. Please follow the approach as we did in class.

Reference no: EM131952318

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