Consider 3-month, near at-the-money European-style call and put options on a given stock that pays no dividends. The options have the same strike price. Assume that the put options in the market are priced too low, based on put-call parity and the true expected volatility.

a) What would be your transactions in order to lock in an arbitrage pricing due to the mispriced options? (By transacting with the call option, the put option, the underlying stock, and a risk-free bond) In the sense of a Future Payoff Table" that shows your initial position and the terminal cash flows at option expiration, then:

b) What would your initial cash flow be? Postive, negative, or zero.

c) If the stock price at option expiration ends up greater than the strike price, then what is your terminal cash flow using the symbols that indicate the payoffs for each of your holdings. And, is the net terminal cash flow in this case Positive, Negative, or Zero.

d) If the stock price at option expiration ends up less than the strike price, then what is your terminal cash flow using the symbols that indicate the payoffs for each of your holdings. And, is the net terminal cash flow in this case Positive, Negative, or Zero.