Assume a standard deviation of 8 percent, and use the Black model to determine if the call option in problem is correctly priced. If not, suggest a riskless hedge strategy ?
Problem
Suppose you observe a one-year futures price of $100, the futures option strike price of $90, and a 5 percent interest rate (annual compounding). If the futures option call price is quoted at $9.40, identify any arbitrage and explain how it would be captured.