Financial Risk Manager Part 1

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Explanation:

Yes, an arbitrage is possible, and it is associated with a bear put spread.

For European puts with the same maturity and no dividends, the price difference should satisfy:

0 \le p(K_2) - p(K_1) \le (K_2 - K_1)e^{-rT}

Here:

p(45) - p(40) = 25.20 - 18.20 = 7.00

and

(45 - 40)e^{-0.04 \times 1} = 5e^{-0.04} \approx 4.80

Since 7.00 > 4.80, the observed spread is too wide, so arbitrage exists.

The relevant option structure is a bear spread in puts (long the higher-strike put and short the lower-strike put). If that spread is overpriced, it can be shorted to lock in arbitrage profit.

Explanation:

Yes, an arbitrage is possible, and it is associated with a bear put spread.

For European puts with the same maturity and no dividends, the price difference should satisfy:

0 \le p(K_2) - p(K_1) \le (K_2 - K_1)e^{-rT}

Here:

p(45) - p(40) = 25.20 - 18.20 = 7.00

and

(45 - 40)e^{-0.04 \times 1} = 5e^{-0.04} \approx 4.80

Since 7.00 > 4.80, the observed spread is too wide, so arbitrage exists.

The relevant option structure is a bear spread in puts (long the higher-strike put and short the lower-strike put). If that spread is overpriced, it can be shorted to lock in arbitrage profit.

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Question-726.3. A non-dividend-paying stock currently trades at a price of `$21.00` while the risk-rate is 4.0%. The stock’s is highly uncertain, with a volatility of 50.0%. Two deeply in-the-money one-year European put options on this stock are trading at the following prices:

The put with a strike price of `$40.00` has a price (premium) of `$18.20`

The put with a strike price of `$45.00` has a price (premium) of `$25.20`

Is an arbitrage possible?

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MManit

Last updated: April 18, 2026 at 11:32

Yes, and it exploited with a straddle

Yes, and it is exploited with a bull spread

Yes, and it is exploited with a bear spread