What would be the gain if there is an arbitrage opportunity


Problem: Suppose the stock price is $55, after six months, it either goes up by the factor U = 1.3209 or it goes down by the factor D = 0.8988, the options mature after T = 0.5 year and have strike price K = $50, a dollar invested in the money market account earns continuously compounded risk-free interest at 5 percent per year. If the market quotes the call price to be $10 today, comparing the market price to the theoretical price, is there an arbitrage opportunity? What would be the gain if there is an arbitrage opportunity?

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Finance Basics: What would be the gain if there is an arbitrage opportunity
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