Suppose that your friend is very bullish on the US stock market.

| March 31, 2017

Question
Suppose that your friend is very bullish on the US stock market. He feels that the market is quite

likely to go up by 5% by the end of the year. He is willing to put down $45 to make a bet that pays

$100 if the market does go up by 5% by the end of the year.

He also agrees that SPY (the exchange traded fund, SPDR S&P 500) represents a good measure of

the market overall. Suppose that SPY currently trades at $208.92. Below are prices for SPY options

that expire on 12/31/2016:

Strike Price of Call

215 $7.26

220 $5.52

225 $3.30

Suppose that they are market prices for European options.

1. Find a portfolio of call options that always pays at least $1 if SPY goes up 5%. You may use

any such portfolio, but try to nd one that has as low price as possible.

2. Explain how you can exploit your friend to create an arbitrage opportunity. That is, explain

how you can create a strategy that gives you money now with no possibility of negative cash ow

in the future. Plot the payoff your strategy as a function of the price of SPY on 12/31/2016.

Get a 30 % discount on an order above $ 50
Use the following coupon code:
COCONUT
Order your essay today and save 30% with the discount code: COCONUTOrder Now
Positive SSL