Construct Arbitrage Strategy
Posted: September 1st, 2008, 4:02 pm
We're asked to solve this problem to hand in on the first day of the Pricing Theory Class. I need some help on how to go about this problem.Q: suppose that a long put with strike $100 is currently selling for $10, and a long call with strike $110(on the same stock with same maturity T) is currently selling for $11.50. The spot price of the asset is $100, and a $1 zero coupon bond with maturity T costs $0.90. Does an arbitrage exist? Construct a strategy to take advantage of it.