1). A European call option has a strike price of $20 and an expiration date in six months. The;premium for the call option is $5. The current stock price is $25. The risk-free rate is 2% per;annum with continuous compounding. What is the payoff to the portfolio, short selling the stock;lending $19.80 and buying a call option? (Hint: fill in the table below.);Value of ST;Payoff;ST 20;ST > 20;How much do you pay for (or receive with) this portfolio at date 0? Is there an arbitrage;opportunity?;If there is an arbitrage opportunity, then answer the following;What is the minimum profit, expressed as a present value? Will investors trade to exploit the;opportunity? If they will trade to exploit the opportunity, explain why security prices change and;describe how security prices change.;Make sure you answer all parts of this question.
Paper#29646 | Written in 18-Jul-2015Price : $27