Answer Happy

Question 10 (10 points) Suppose that there are two European put options on the same underlying asset with the same time to matu- rity, i.e., investors can buy or write those two put options. Put X has a strike price of $30 and Put Y has a strike price of $40. Put X's premium is $3.25 and Put Y's premium is $2.50. What opportunities are there for an arbitrageur? Please write down all the steps on how to find arbitrage opportunity, how to arbitrage, and demonstrate that this is an arbitrage strategy? Hint: Step 1: identify the arbitrage opportunity with reasoning/calculation. Step 2: to demonstrate that this is an arbitrage opportunity, you want to show that you will have a positive payoff today and non-negative payoff at the expiration, no matter what the state of nature (i.e., the rage of Sr) will be at T. You do not need to assume additional specific numbers except for those given in the question.