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1

In any "arbitrage" situation, you are trying to create a scenario where you sold a rich asset and bought a cheap asset, while keeping the overall position as flat as possible to risk. Assuming interest rates have not changed from continuously compounded 4%, and the company can borrow at this rate and sell a forward at this rate. The company is buying the ...


2

Your question is in fact one on the linearity of the replication cost of an option. Let formulate it a general way: once you can express the replication cost $C$ of a payoff as a function of several factors $X$, the strike $S$ and the volatility $\sigma$ that you assume to be a function of the strike, you are asking if $$\frac{1}{N}\sum_\ell C\big(X, S_\ell,...


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