### What are the no-arbitrage boundary conditions

Assignment Help Financial Management
##### Reference no: EM13197358

Inclusive have the following common conditions:

• the riskless interest rate r > 0 ;
• the underlier is trading at a spot price S ; and
• all options are European vanillas on the same underlier and have the same maturity date T 0.

Question 1

What are the no-arbitrage boundary conditions for the value of a European vanilla Call option with strike price K1 ?

Question 2

Another European vanilla Call option with strike price K 2 > K1 is trading in the market. What are the new no-arbitrage boundary conditions for the value of the European vanilla Call option with strike price K1?

Question 3

Another European vanilla Call option with strike price K3 is trading in the market. At the expiry of the three options (i.e. at T = 0 ), what are the new no-arbitrage boundary conditions for the value of the European vanilla Call option with strike price K1 , if K 3 < K1 < K2 and K1 - K 3 = K 2 - K1 ?

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