An American put option, with an exercise price of $15, sells for $7.50; the stock price is $6 presents an arbitrage opportunity. (Assume no transaction costs and any option can be exercised immediately).

Question

Quizplus · Accepted Answer

Since the stock price ($6) is less than the exercise price ($15), the intrinsic value of the put option is $9 ($15 - $6). Selling the put option for $7.50 when its intrinsic value is $9 presents an arbitrage opportunity, as one could exercise the option immediately for a profit.

An American Put Option, with an Exercise Price of $15