Annotated Bibliography Writing Services: Assume that Call 1 trades for $6 and that Call 2 trades for $7. Do these prices allow arbitrage? Explain. If they do permit arbitrage, explain the arbitrage transactions.

Two call options are written on the same stock that trades for $70, and both calls have an exercise price of $85. Call 1 expires in six months, and Call 2 expires in three months. Assume that Call 1 trades for $6 and that Call 2 trades for $7. Do these prices allow arbitrage? Explain. If they do permit arbitrage, explain the arbitrage transactions.

part 2

Given the following option pricing parameters:

Stock: $60

Strike: $60

Volatility: 20% per annum

Maturity: 180 days (assume 360 day-year)

Risk-free rate: 9% per annum

Dividend yield: 12% per annum

(a) Price an American Call option with a 5-step Binomial Tree.

(b) Price a Call option again with the Black-Schole Option Pricing Model.

(c) Analyse the reasons for the difference in Call option premiums in parts (a) and (b) above.

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