Option Trading Strategies - Mock Test - II, Q#: 4.

anirban.dutta
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Option Trading Strategies - Mock Test - II, Q#: 4.

Postby anirban.dutta » Mon May 12, 2014 6:42 am

The tock price of a US company is$42 and the call option on the stock having a strike price at $44 is trading at $3. The call expires in a year. A put option having the same exercise price and expiration date is priced at $25. Assume an annual risk-free rate of 5%. If there is a risk-free bond which pays the risk-free rate and can be shorted free of cost then which of the following trading strategies will result in an arbitrage profit? Assume it to be frictionless transaction.

A. Long the call option and the risk-free bond and short the stock and the put option.
B. Long the call option and the stock and short the put option and the risk-free bond
C. Long the call option and the put option and short the stock and risk-free bond
D. Long the put option and the risk-free bond, and short the stock and the call option.

edupristine
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Option Trading Strategies - Mock Test - II, Q#: 4.

Postby edupristine » Thu May 15, 2014 8:11 am

p+S0 = 2.5+44 = $46.5
c+Ke-rT = 3+44e-0.05 = $44.85 which is lesser providing arbitrage opportunity. So long the call option and the risk-free bond and short the stock and the put option.


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