A European call on OPSY stock with a strike price of $22.50 is worth $1.75.Let the present value of the strike price be $22.25.A European put on the stock with identical terms is worth the same.If the price of OPSY stock is $22,the arbitrage profit that you can create today by trading the stock and other related securities is:

Question

Quizplus · Accepted Answer

If the price of OPSY stock is $22, then the European call option with a strike price of $22.50 would be worthless, as no one would choose to exercise an option that is out of the money. However, since the option is currently priced at $1.75, an investor could sell the option for this amount and simultaneously purchase 100 shares of OPSY stock for $22 each, for a total cost of $2,200. If the investor were to exercise the option at a later date when the stock price has risen above $22.50, they would sell their shares for a profit and cover the cost of the option premium. Alternatively, if the stock price remains below $22.50, the investor would simply let the option expire worthless and suffer a loss of the option premium. Either way, the cost of the strategy is $2,200, and the potential profit is the difference between the stock price and the strike price of the option, minus the option premium. In this case, the potential profit is $0.25. Therefore, the arbitrage profit that can be created today by trading the stock and other related securities is $0.25.

A European Call on OPSY Stock with a Strike Price