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A one - month ( maturing in a month ) European call option on a non - dividend - paying stock is currently selling for
A onemonth maturing in a month European call option on a nondividendpaying stock is currently selling for $ The stock price is $ the strike price is $ and the riskfree interest rate is per
annum with continuous compounding. How can you arbitrage?
Hint:
Max where is the call price today, is the stock price, is the strike price, is the risk free rate with continuous compounding rate, and is the time to maturity.
Buying a riskfree bond is equivalent to lending at a riskfree rate. Selling a riskfree bond is equivalent to borrowing at a riskfree rate.
A Short call, long stock, borrow money at risk free rate
B Long call, long stock, borrow money at risk free rate
C Short call, short stock, lend money at risk free rate
D Long call, short stock, lend money at risk free rate
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