7.12 Puts: An Arbitrage possibility? (continued Is p>Xe-rT-So? Xe-rT-s 0 50e005(025)-48 49.37-48 1.37 No arbitrage possibility 3>1 An arbitrage is possible if p=1 The risk-less profit 0. 37 can be obtained by borrowing Xe, buying Put and Stock(See slide 7.10 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, Shanghai Normal UniversityOptions, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, Shanghai Normal University 7.12 Puts: An Arbitrage Possibility? (continued) • Is p > Xe-rT - S0 ? Xe-rT - S0 = = 50e-0.05(0.25) - 48 = 49.37 - 48 = 1.37 • No arbitrage possibility 3 > 1.37 • An arbitrage is possible if p=1 The risk-less profit 0.37 can be obtained by borrowing Xe-rT, buying Put and Stock (See slide 7.10)