Determine the year-end prices for underlying stock results

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Reference no: EM132200378

Question - Three European call options expire in 1 year. The call options have the same underlying stock, but they have different strike prices and premiums.

Put Option

A

B

C

Strike

45

50

53

Premium

7.00

5.00

3.00

The continuously compounded risk-free rate of return is 11%.

A profit-maximizing arbitrageur constructs an arbitrage strategy in which arbitrage profits are accumulated at the risk-free rate of return.

Determine which of the following year-end prices for the underlying stock results in the highest arbitrage profits.

(a) $40

(b) $46

(c) $50

(d) $52

(e) $55

Reference no: EM132200378

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