Question

Adam Smith is a portfolio manager with Point72 Investments, a U.S.-based asset management firm. Smith is considering using options to enhance portfolio returns and control risk. He asks his junior analyst, John Miller, to help him. John collected the current market prices and data of selected instruments related to Lotus stock in Table 2. According to Table 2, which of the following should be Smith's arbitrage strategy? (Choose the best answer)

Table 2

European call option on Lotus equity	$6
European put option on Lotus equity	$3.0
Lotus equity price	60
Time to expiration of options in months	3
Exercise price of options	60
Risk-free rate	8%
Dividend to be paid in 3 months	$0.00

		" short the put option, long the stock, long the call option, and lend money"
		" long the put option, long the stock, short the call option, and borrowing money"
		" short the put option, short the stock, long the call option, and borrow money"
		" short the put option, short the stock, long the call option, and lending money"
		" short the put option, short the stock, short the call option, and lending money"

Answer 1

" short the put option, long the stock, long the call option, and lend money"= 3-60 -6+ 60e-0.08*3/12 = -4.188

" long the put option, long the stock, short the call option, and borrowing money"=

-3-60+6-60e^-0.08*3/12

= -115.811

" short the put option, short the stock, long the call option, and borrow money"=

3+60-6-60e^-0.08*3/12

= -1.811

" short the put option, short the stock, long the call option, and lending money"=

3+60-6+60e^-0.08*3/12

=115.811

" short the put option, short the stock, short the call option, and lending money"=

3+60+6+60e^-0.08*3/12

^=127.811