2. Suppose call and put prices are given by: Strike Call Premium Put Premium 80 22 4 100 9 21 105 5 24.80 Find the convexity violations by computing the change in premium per dollar change in the strike price. What spread would you use to effect arbitrage? (Hint: 1:5:4) Demonstrate that the spread position is an arbitrage.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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2. Suppose call and put prices are given by:
Strike
Call Premium
Put Premium
80
22
4
100
9
21
105
5
24.80
Find the convexity violations by computing the change in premium per dollar change in
the strike price. What spread would you use to effect arbitrage? (Hint: 1:5:4)
Demonstrate that the spread position is an arbitrage.
Transcribed Image Text:2. Suppose call and put prices are given by: Strike Call Premium Put Premium 80 22 4 100 9 21 105 5 24.80 Find the convexity violations by computing the change in premium per dollar change in the strike price. What spread would you use to effect arbitrage? (Hint: 1:5:4) Demonstrate that the spread position is an arbitrage.
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