What type of transaction you execute to achieve benefit

Reference no: EM13926034

1. Suppose that you observe a European call option that is priced at less than the value Max[0, S0 - X(1 + r)-T]. What type of transaction should you execute to achieve the maximum benefit? Demonstrate that your strategy is correct by constructing a payoff table showing the outcomes of expiration.

2. Explain why an option's time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep-in- or out-of-the-money.

Reference no: EM13926034

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