Currently the spot price of a stock is 18 per share. A European call option written on that stock has an exercise price of 16. The remaining maturity is 3 months and current annual rate of interest is 12%. The call premium is currently $ 1.4. An investor expects an arbitrage gain after seeing these prices. He/she implements a short sale while also buying that call.
Is there an arbitrage gain if the stock price at maturity is 20. If so; what is the arbitrage gain ?
Is there an arbitrage gain if the stock price at maturity is 14? If so; what is the arbitrage gain?