A stock has a price of $84 and a volatility of 25% per annum. European options on the stock have a strike price of $80 and a time to maturity of 180 days. The risk free interest rate is 5% per annum on a continuously compounded basis. The stock pays dividends at a continuously compounded rate of 3.0%. Use the BSMOPM.

Use this information to answer the next 2 questions.

Which of the following represents the correct positions in the stock and the risk free zero coupon bond to replicate a short position in 1 call option?

a. Buy 0.6538 shares of stock; Short 0.5828 bonds with a face value of $80

b. Short-sell 0.6538 shares of stock; Buy 0.5828 bonds with a face value of $84

c. Short-sell 0.6538 shares of stock; Buy 0.5828 bonds with a face value of $80

If the put option is underpriced, which of the following represents the correct arbitrage strategy?

a. Buy 1 put option; Short-sell 0.3316 shares of stock

b. Buy 1 put option; Buy 0.3316 shares of stock

c. Buy 1 put; Short-sell 1 share of stock