# Show that arbitrage profits are possible by describing the arbitrage trades. ### Best Available Writers Show that arbitrage profits are possible by describing the arbitrage trades.

The lower bound for the price of an American put OPTION is P(S(t), t) ≥ max(E−S(t), 0), while the lower bound for the price of a European put option is(S(t), t) ≥ max(E e−^r(T −t)− S(t), 0).

(a) Suppose that E > S(t) and that P(S(t), t) < E − S(t) where P(S(t), t) is the price of an American put option. Show that arbitrage profits are possible by describing the arbitrage trades. (This is intended to be easy – no borrowing or lending is needed, and the profits occur immediately.)

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(b) Suppose instead that E e−^r(T −t) > S(t) and that p(S(t), t) < E e−^r(T −t) − S(t) where p(S(t), t) is the price of a European put OPTION . Show that arbitrage profits are possible by describing the arbitrage trades. (It is important to remember that the European put can be exercised only at maturity T.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades.

Show that arbitrage profits are possible by describing the arbitrage trades. 