You can trade Twitter stock (NYSE:TWTR) and two put options written on Twitter,

ID: 2612521 • Letter: Y

Question

You can trade Twitter stock (NYSE:TWTR) and two put options written on Twitter, both with the same expiration date. Suppose that you have the following table providing information on these two puts.

Suppose that the annualized risk-free rate is 2% and the current price of Twitter is equal to $40.

Does there exist an arbitrage opportunity? If your answer is "No," explain why there exists no arbitrage. If your answer is "Yes," explain how yould lock-in arbitrage profits.

*** Show All Work ***

Exercise Price Put Price Put 1 45 4 Put 2 50 2

Explanation / Answer

Yes Arbitrage opportunity exists Sell Put & Buy Put 2 Loss on Put 1 $0.00 Profit on Put 2 ($50 - $40) $10.00 Option Premium Received $4.00 Option Premium Paid -$2.00 Total Profit $12.00

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You can trade Twitter stock (NYSE:TWTR) and two put options written on Twitter,

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