What spread position would you use to effect an arbitrage

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Reference no: EM131074629

Suppose call and put prices are given by: Strike 75 80 Call premium 7 8 Put premium 4 10

a) i) What no-arbitrage condition is violated by the call premiums?

ii) What spread position would you use to effect an arbitrage?

iii) Demonstrate that the spread position is an arbitrage; that is, show that a positive profit results no matter what stock price occurs.

b) ) i) What no-arbitrage condition is violated by the put premiums?

ii) What spread position would you use to effect an arbitrage?

iii) Demonstrate that the spread position is an arbitrage; that is, show that a positive profit results no matter what stock price occurs.

Reference no: EM131074629

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