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 six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent.

-Refer to Exhibit 14.6. 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

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 six months from today. The risk-free rate of return is 5 percent, and the expected return on the market is 11 percent.
 
-Refer to Exhibit 14.6. 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

CArbitrage opportunities involve taking advantage of price discrepancies in the market without taking on any risk. Option A, selling the stock short, writing a put, buying a call, and investing the proceeds at the risk-free rate, and Option C, selling the stock short, buying a put, writing a call, and investing the proceeds at the risk-free rate, both represent strategies that could potentially exploit mispricings between the stock, its options, and the risk-free asset to lock in a risk-free profit. These strategies involve a combination of positions that could, under certain conditions, lead to an arbitrage opportunity depending on the relative pricing of the calls, puts, the stock, and the risk-free asset.