USe the following data for a single-period binomial model to answer the questions that follow.
YBM's stock price S is $102 today.
- After six months,the stock price can either go up to $115.63212672,or go down to $93.52995844.
- Options mature after T = 6 months and have an exercise price of K =$105.
- The continuously compounded risk-free interest rate r is 5 percent per year.
-Given the above data,suppose that a trader quotes a call price of $6.Then the arbitrage profit that you can make today by trading this call and related securities is:

Question

Quizplus · Accepted Answer

The arbitrage profit can be calculated by first determining the fair value of the call option using the binomial model and then comparing it to the quoted price. The fair value of the call option is calculated using the formula that incorporates the up and down movements of the stock price, the exercise price, the risk-free rate, and the time to maturity. Given the data, the fair value of the call option does not match the quoted price of $6, leading to an arbitrage opportunity where the profit is $0.81. This discrepancy allows for a risk-free profit by exploiting the difference between the theoretical fair value and the market price of the call option.

USe the Following Data for a Single-Period Binomial Model to Answer