Define the term arbitrage

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Question: An American call option is written on a stock whose price today is S = 50. The exercise price of the call is X = 45.

a. If the call price is 2, explain how you would use arbitrage to make an immediate profit.

b. If the option is exercisable at time T = 1 year and if the interest rate is 10%, what is the minimum price of the option? Use Proposition 1.

Reference no: EM131453816

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