There Are Three- and Six-Month American Calls On $A B C$

question 8

Multiple Choice

There are three- and six-month American calls on $A B C$ stock.Suppose the three-month option costs $5 and the six-month option costs $3.Which of the following statements is most accurate given this information?

• A)There is an arbitrage strategy which involves buying the three-month call and selling the six-month call.
• B)There is an arbitrage strategy which involves buying the six-month call and selling the three-month call.
• C)There is no arbitrage available in this setting.
• D)If there is a sufficiently large dividend payment between three and six months,there is no arbitrage in this situation.

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