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A European call option on a non-dividend-paying stock is $4.5 and has a strike price of...

A European call option on a non-dividend-paying stock is $4.5 and has a strike price of $30. It expires on 6 months. The risk free rate is 8% and the stock price is $27. What opportunities are there for an arbitrageur?

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Answer #1

In the present case the value of the strike price is = 28.82

$28.82 is the present value of $30.

As, 4.5> 28.82-27

An arbitrageur must not buy the call option as premium on the call option is higher to the difference between the present value of strike price and the spot price.

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