Question
David Murphy observes that a stock, Twin Inc., which is not expected to pay dividends in the next year, is currently trading at $38.56/share. A
David Murphy observes that a stock, Twin Inc., which is not expected to pay dividends in the next year, is currently trading at $38.56/share. A put option with a strike price of 40 and 6-month expiration date costs $5.15 and a call option with the same strike and expiration date is priced at $4.32 for each share Twin's stock. The current risk-free rate is 0.2% per month. After checking the prices with the put-call parity, David decides to take an arbitrage opportunity by
A. Taking short positions in the call option and the underlying stock and holding long positions in the risk-free zero-coupon bond with a par of $40 and in the put option. B. Taking short positions in the put option and the underlying stock and holding long positions in the risk-free zero-coupon bond with a par of $40 and in the call option. C. Taking long positions in the call option and the underlying stock and holding short positions in the risk-free zero-coupon bond with a par of $40 and in the put option. D. Taking long positions in the put option and the underlying stock and holding short positions in the risk-free zero-coupon bond with a par of $40 and in the call option.
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