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Question 6 ( 1 0 marks ) Stock A is selling at $ 6 5 with a volatility of 3 0 % . The beta

Question 6(10 marks)
Stock A is selling at $65 with a volatility of 30%. The beta of the stock is 2.15. The call
option with exercise price of $60 has a premium of $7.27, and the put option with exercise
price of $60 costs $1.60. All options considered have a maturity of 3 months. The risk-free
rate is 5%.
a) Devise a zero-net-investment arbitrage strategy to exploit the mispricing. (5 marks)
b) Suppose there is another put option with strike price $62 sells for $1.60. Devise a
zero-net-investment arbitrage strategy to exploit the mispricing between the two put
options. Assume that you hold the put options position until expiration, draw the
profit diagram at expiration for your position? (5 marks)
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