Data for a single-period binomial model

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The next two questions are based on the following data for a single-period binomial model: A stock's price S is $60. After six months, it either goes up by the factor U = 1.28299108or it goes down by the factor D = 0.8387506. Options mature after T = 0.5 year and have strike price K = $55. A dollar invested in the money market account earns continuously compounded risk-free interest at 3 percent per year.

a. Suppose the market price of the call option is $6. Is there an arbitrage opportunity? Explain how one would trade to exploit this arbitrage.

Reference no: EM133002670

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