If the market price of an option just before its expiration is $33 while its strike price is $29, arbitrage will determine a price for it that:
A)leaves an investor indifferent between buying the stock outright or buying an option and then exercising it.
B)encourages the investor to buy the stock outright and sell it when the option expires.
C)encourages the investor to buy an option and exercise it only after its expiration.
D)encourages the investor to buy the stock outright and rewrite an option later.

Question

Quizplus · Accepted Answer

Arbitrage ensures that there are no riskless profit opportunities in the market. In this scenario, if the price of the option is $33, an investor can buy the stock for $29 and simultaneously sell the call option for $33. This would result in a riskless profit of $4 per share, which is not possible in an efficient market. Therefore, the arbitrage price of the option would be such that it leaves the investor indifferent between buying the stock outright and buying the option and then exercising it.

If the Market Price of an Option Just Before Its