Positive probability of overall profit

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Reference no: EM131068981

Suppose you buy a call on a share and short sell 1 share. It may seem at first, e.g., by sketching a profit/loss diagram, that it is possible to adjust the strike price of the call to get a portfolio with zero loss potential but a positive (nonzero) probability of overall profit. Intuition (or arbitrage!) tells us this should not be possible; analyse the suggested strategy and show that it is not in fact possible.

Reference no: EM131068981

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