Question
Use the following information to answer questions 8 and 9. A share of stock has both put and call options outstanding based on it. The
Use the following information to answer questions 8 and 9.
A share of stock has both put and call options outstanding based on it. The current stock
price is $70. The call and put options both have 40 days to expiration and exercise prices
of $65. The risk free rate is 4%. The call option is currently priced at $6.40 and the put
option is priced at $2.40. The stock does not pay dividends.
8. What steps would you take today to take advantage of this arbitrage opportunity?
a.) Buy the call option, sell the put option, short the stock, and invest $64.72 at the
risk-free rate.
b.) Sell the call option, buy the put option, short the stock, and invest $64.72 at the
risk-free rate.
c.) Buy the call option, sell the put option, buy the stock, and borrow $64.72 at the
risk-free rate.
d.) Sell the call option, buy the put option, short the stock, and borrow $64.72 at the
risk-free rate.
9. What amount of arbitrage profit would be earned?
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