Generate risk free arbitrage

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Reference no: EM131997954

Near market closing time on a given day, you lose access to stock prices, but some European call and put prices for a stock are available as follows:

Strike Price Call Price Put Price

$40             $11 $3

$50               $6 $8

$55 $3    $11

All six options have the same underlying and expiration date.

(i) Are these prices consistent?

(ii) Construct a portfolio that will generate a risk free arbitrage pro t if this is possible.

Reference no: EM131997954

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