Question

A European call option on a certain stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $30 \%$. A European put option on the same stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $33 \%$. What is the arbitrage opportunity open to a trader? Does the arbitrage work only when the lognormal assumption underlying Black-Scholes-Merton holds? Explain carefully the reasons for your answer.

   A European call option on a certain stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $30 \%$. A European put option on the same stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $33 \%$. What is the arbitrage opportunity open to a trader? Does the arbitrage work only when the lognormal assumption underlying Black-Scholes-Merton holds? Explain carefully the reasons for your answer.
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 20, Problem 13 ↓

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For the call option: - Stock price: unknown - Strike price: $30 - Time to maturity: 1 year - Implied volatility: 30% For the put option: - Stock price: unknown - Strike price: $30 - Time to maturity: 1 year - Implied volatility: 33% To calculate the theoretical  Show more…

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A European call option on a certain stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $30 \%$. A European put option on the same stock has a strike price of $$\$ 30$$, a time to maturity of 1 year, and an implied volatility of $33 \%$. What is the arbitrage opportunity open to a trader? Does the arbitrage work only when the lognormal assumption underlying Black-Scholes-Merton holds? Explain carefully the reasons for your answer.
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