The no-arbitrage condition is violated at option expiry when the value of an in-the-money call option is below the price of its underlying.

Here's why:

A. A put option being below its exercise price does not violate the no-arbitrage condition. A put option gives the holder the right to sell an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the put option will be out-of-the-money and its value will be less than the exercise price. This is a normal situation and does not violate the no-arbitrage condition.

B. A put option being below its exercise value also does not violate the no-arbitrage condition. The exercise value of a put option is the amount that the holder would receive if they exercised the option. If the market price of the asset is higher than the exercise price, the exercise value will be zero (since the holder would not choose to sell the asset at the lower exercise price). Therefore, the value of the put option being less than the exercise value does not violate the no-arbitrage condition.

C. A call option being below the price of its underlying does violate the no-arbitrage condition. A call option gives the holder the right to buy an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the call option will be in-the-money and its value should be at least the difference between the market price and the exercise price. If the value of the call option is less than this difference, an arbitrage opportunity exists: one could buy the call option, exercise it to buy the asset at the exercise price, and then sell the asset at the market price, making a risk-free profit. This situation violates the no-arbitrage condition.

Question

The no-arbitrage condition is violated at option expiry when the value of an in-the-money call option is below the price of its underlying.

Here's why:

A. A put option being below its exercise price does not violate the no-arbitrage condition. A put option gives the holder the right to sell an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the put option will be out-of-the-money and its value will be less than the exercise price. This is a normal situation and does not violate the no-arbitrage condition.

B. A put option being below its exercise value also does not violate the no-arbitrage condition. The exercise value of a put option is the amount that the holder would receive if they exercised the option. If the market price of the asset is higher than the exercise price, the exercise value will be zero (since the holder would not choose to sell the asset at the lower exercise price). Therefore, the value of the put option being less than the exercise value does not violate the no-arbitrage condition.

C. A call option being below the price of its underlying does violate the no-arbitrage condition. A call option gives the holder the right to buy an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the call option will be in-the-money and its value should be at least the difference between the market price and the exercise price. If the value of the call option is less than this difference, an arbitrage opportunity exists: one could buy the call option, exercise it to buy the asset at the exercise price, and then sell the asset at the market price, making a risk-free profit. This situation violates the no-arbitrage condition.

Knowee AI · Accepted Answer

The no-arbitrage condition is violated at option expiry when the value of an in-the-money call option is below the price of its underlying.

Here's why:

A. A put option being below its exercise price does not violate the no-arbitrage condition. A put option gives the holder the right to sell an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the put option will be out-of-the-money and its value will be less than the exercise price. This is a normal situation and does not violate the no-arbitrage condition.

B. A put option being below its exercise value also does not violate the no-arbitrage condition. The exercise value of a put option is the amount that the holder would receive if they exercised the option. If the market price of the asset is higher than the exercise price, the exercise value will be zero (since the holder would not choose to sell the asset at the lower exercise price). Therefore, the value of the put option being less than the exercise value does not violate the no-arbitrage condition.

C. A call option being below the price of its underlying does violate the no-arbitrage condition. A call option gives the holder the right to buy an asset at a certain price (the exercise price). If the market price of the asset is higher than the exercise price, the call option will be in-the-money and its value should be at least the difference between the market price and the exercise price. If the value of the call option is less than this difference, an arbitrage opportunity exists: one could buy the call option, exercise it to buy the asset at the exercise price, and then sell the asset at the market price, making a risk-free profit. This situation violates the no-arbitrage condition.

The no-arbitrage condition is violated at option expiry when the value of an in-the-money:A.put option is below its exercise price.B.put option is below its exercise value.C.call option is below the price of its underlying.

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