Schweser, book V, p.64 In the example they tell us that since option cost is 6,50$ not 5,14$, arbitrage opportunity exists. Well, if we actually use 5,14 as an option cost, arbit. opp. still exists… Delta Hedge = (10 - 0) / (40 - 22.50) = 0,5714 per option (lets use 100 options like SCHW) net portfolio cost = (57,14 x 30) - (100 x 5,14) = 1200,2 Now lets due scenarios: up move: (57,14 x 40) - (100 x 10) = 1286 down move: (57,14 x 22,50) - (100 x 0) = 1286 so… in both situations arbitrage riskless profit exists since = 1286 / 1200,2 = 7,15% return Can somebody please explain this to me? CPK?
SFR, Look at the rfr…surely the 7.15 you earn is effectively RFR when you have option price at 5.14…so you don’t make any more through arb?
risk free rate is 7%, so this 0,15 = 7,15 - 7,00 (2$) is due to round rounding right?
. need to see the question and solution before I post. I do not believe a delta hedge is what they are talking about here.