If a call is underpriced and you buy the call and sell short the stock,it is equivalent to investing money at more than the risk-free rate.

Question

Quizplus · Accepted Answer

If the call is underpriced, it means the option is cheaper than it should be based on the underlying stock's price and other market factors. By buying the call and selling short the stock, you can profit from the option's price increase and the stock's price decrease. This is equivalent to taking advantage of an arbitrage opportunity, which would result in a riskless profit (assuming no transaction costs). Therefore, it is equivalent to investing money at more than the risk-free rate.

If a Call Is Underpriced and You Buy the Call