Question

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 with an
arbitrage table.

buy the put , buy the call, sell stock, sell a bond |
||

buy the stock, buy the bond, write the put, write the call |
||

buy the call, buy a bond, write the put, sell stock |
||

buy a put, buy stock, write the call, sell bond |
||

no arbitrage is available for these asset prices |

Answer #1

**Answer :
buy the call,buy a bond,write the put,sell stock**

For call option:

Current price of stock = $34

Call strike price = $32

for this we wiil excercise the call option since strike price is less than current price.

Intrinsic value = $34 - $32 = 2

For put option

Current price of stock = $34

Put strike price = $32

for this we wiil not excercise the call option since strike price is less than current price.

Intrinsic value = 0

So we will write the put option.

Hence,

**Strategy is Buy the call,Buy a bond,Write the put,sell
stock to maximize portfolio profits.**

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