Question

q 12

"You are evaluating European puts and calls with same strike price that are expring in six months on a certain stock. Your evaluation reveals that sum of call price and present value of strike equals $35.5; and sum of put price and current stock price equals to $37. Which positions do you need on the call, the put and stock for an arbitrage profit?"

		"Buy the put, buy the stock and write the call"
		Write the call and buy the stock
		There is No arbitrage opportunity
		Buy the put and short-sell the underlying stock
		"Buy the call, write the put and short-sell the stock"

Answer 1

	For an arbitrage profit,
1)	Buy Call Option and Buy Risk Free Investment at Present Value of Strike Price
2)	Short sell Shares and sell Put Option
	Arbitrage Profit will be
A.	Short Sale of Share and Sell of Put Option	$37.00
B.	Purchase of Call Option and Risk Free Investment	$35.50
	Arbitrage Profit ($37 - $35.50)	$1.50
	So Answer is
	Buy the call, write the put and short-sell the stock