Exhibit 20.6
Use the Information Below for the Following Problem(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%.
$$\begin{array} { c c c }
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-Refer to Exhibit 20.6.How could an investor create arbitrage profits?
A) Sell the stock short, write a put, buy a call and invest the proceeds at the risk-free rate.
B) Buy the stock, write a put, buy a call and invest the proceeds at the risk-free rate.
C) Sell the stock short, buy a put, write a call and invest the proceeds at the risk-free rate.
D) Buy the stock, write a put, buy a call and borrow the strike price at the risk-free rate.
E) Sell the stock short, write a put, buy a call and borrow the strike price at the risk-free rate.

Question

Exhibit 20.6
Use the Information Below for the Following Problem(S)
The current stock price of ABC Corporation is $53.50. ABC Corporation has the following put and call option prices that expire 6 months from today. The risk-free rate of return is 5% and the expected return on the market is 11%.
 $$\begin{array} { c c c } 
\text { Exprcisp Price } & \text { Put Price } & \text { Call Price } \
50 & \$ 1.50 & \$ 5.75 \
55 & \$ 3.25 & \ldots
\end{array}$$
-Refer to Exhibit 20.6.How could an investor create arbitrage profits?
A) Sell the stock short, write a put, buy a call and invest the proceeds at the risk-free rate.
B) Buy the stock, write a put, buy a call and invest the proceeds at the risk-free rate.
C) Sell the stock short, buy a put, write a call and invest the proceeds at the risk-free rate.
D) Buy the stock, write a put, buy a call and borrow the strike price at the risk-free rate.
E) Sell the stock short, write a put, buy a call and borrow the strike price at the risk-free rate.

Quizplus · Accepted Answer

The stock price is $53.50 and the synthetic stock price is $53.04.The synthetic stock price is created by combining a long call,short put,and the present value of the strike price.The synthetic stock and stock price must converge.So shorting the stock (-S)and going long the synthetic stock (C - P + PV(X))will create an arbitrage profit.

Exhibit 20 -Refer to Exhibit 20