Question

A European call with strike X and maturity T is trading at c.
The underlying stock does not pay any dividend. The annual interest
rate is r_{f}. Suppose c > S – X/(1+r_{f})^T and
one call is on one share for simplicity. Then you can_____ one
call, ____one share of the stock and ____ X/(1+r_{f})^T to
form an arbitrage portfolio.

buy, sell, borrow |
||

sell, buy, lend |
||

sell, buy, borrow |
||

buy, sell, lend |

Answer #1

The correct answer is "sell, buy, borrow"

The call price should be equal to S – X/(1+r_{f})^T to
avoid arbitrage. Here "S" is the stock price and
X/(1+r_{f})^T is the present value of strike price. So as c
> S – X/(1+r_{f})^T, so Call price is overvalued, it
means it will go down. So you need to sell call.

If the call price doesn't increase then stock should increase to
tally the equation. So the stock is under-priced now, buy it. You
need to have money to enter the strategy, so borrow
X/(1+r_{f})^T.

A stock that does not pay dividend is trading at $20. A European
call option with strike price of $15 and maturing in one year is
trading at $6. An American call option with strike price of $15 and
maturing in one year is trading at $8. You can borrow or lend money
at any time at risk-free rate of 5% per annum with continuous
compounding. Devise an arbitrage strategy.

A six-month European call option's underlying stock price is
$86, while the strike price is $80 and a dividend of $5 is expected
in two months. Assume that the risk-free interest rate is 5% per
annum with continuous compounding for all maturities.
1) What should be the lowest bound price for a six-month
European call option on a dividend-paying stock for no
arbitrage?
2) If the call option is currently selling for $2, what
arbitrage strategy should be implemented?
1)...

A European call option on a stock with a strike price of $50 and
expiring in six months is trading at $14. A European put option on
the stock with the same strike price and expiration as the call
option is trading at $2. The current stock price is $60 and a $1
dividend is expected in three months. Zero coupon risk-free bonds
with face value of $100 and maturing after 3 months and 6 months
are trading at $99...

A European call option on a stock with a strike price of $50 and
expiring in six months is trading at $14. A European put option on
the stock with the same strike price and expiration as the call
option is trading at $2. The current stock price is $60 and a $1
dividend is expected in three months. Zero coupon risk-free bonds
with face value of $100 and maturing after 3 months and 6 months
are trading at $99...

The price of a European call that expires in six months and has
a strike price of $28 is $2. The underlying stock price is $28, and
a dividend of $1 is expected in 4 months. The term structure is
flat, with all risk-free interest rates being 6%. If the price of a
European put option with the same maturity and strike price is $3,
what will be the arbitrage profit at the maturity?

You want to price a European call option on stock X, which
currently trades at $40 per share (this stock does not currently
pay dividends). Suppose there are two possible outcomes for share
prices of stock X next period: It can go up by 15%, or it can drop
by 10%.
The option expires in one period, and has a strike price of $41.
The risk-free rate over the next period is 5% (you can lend and
borrow at the...

Consider a put and a call, both on the same underlying stock
that has present price of $34. Both options have
the same identical strike price of $32 and
time-to-expiration of 200 days. Assume that there
are no dividends expected for the coming year on the stock, the
options are all European, and the interest rate is
10%. If the put premium is $7.00
and the call premium is $12.00, which portfolio
would yield arbitrage profits? Hint: Check your answer...

A European call option on a stock with a strike price of $75 and
expiring in six months is trading at $5. A European put option on
the stock with the same strike price and expiration as the call
option is trading at $15. The current stock price is $64 and a $2
dividend is expected in three months. Zero coupon risk‐free bonds
with face value of $100 and maturing after 3 months and 6 months
are trading at $99...

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

A
European call option and put option on a stock both have a strike
price of $20 and an expiration date in three months. Both sell for
$3. The risk-free interest rate is 10 % per aunum, the current
stock price is $19 , and a $1 dividend is expected in one month.
identify the arbitrage oppotunity to a trader.

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