Riskless profit from two continuously compounded accounts
Question
Two bank accounts both start at value : account grows at a continuously compounded per year and account at . You start with no money, and you may only deposit into or borrow from each account in whole units; simply depositing your own cash is not an option. What is the smallest profit you can lock in after one year? Give two decimal places.
Short answer
About . Borrow one unit from the account and deposit it in the account. After a year you hold and owe , a riskless gain of .
Adapted from QuantQuestions.io; question and answer rewritten by SelfMadeQuant.com.
See the hint and the full worked solution in the question bank (free account).
Open the worked solutionLessons behind this question
- Market Model and Risk-Neutral Valuation
- Option Mechanics: Calls, Puts, Moneyness, Intrinsic Value, and Exchange vs. OTC Markets
- Option Trading Strategies: Spreads, Combinations, and Payoff Engineering
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