Question

Assume that the stock price is $56, call option price is $9, the put option price is $5, risk-free rate is 5%, the maturity of both options is 1 year , and the strike price of both options is 58. An investor can __the put option, ___the call option, ___the stock, and ______ to explore the arbitrage opportunity.

sell, buy, short-sell, lend

buy, sell, buy, lend

sell, buy, short-sell, borrow

buy, sell, buy, borrow

Answer #1

As per Call Put Partiy

where r is the risk free rate of return i.e. 0.05

t is the time period 1

58 * e^(-0.05*1) + 9 = 56 + 5

58 * 0.9512294245 + 9 = 56 + 5

55.17 + 9 = 61

64.17 61

LHS > RHS

Call is over- valued it should be sold and Put is undervalued, so it should be bought, stock should also be bought.

So Option D is correct.

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