A "no-arbitrage restriction" on option prices is the statement that
A) Options on possibly different stocks that trade at the same price must have the same payoffs.
B) An option written on a specific stock will be perfectly correlated with the stock.
C) The price of an option is such that no strategy can be constructed using the option and the underlying that generates arbitrage profits.
D) Arbitrage trading in options is prohibited by the SEC.

Question

Quizplus · Accepted Answer

The "no-arbitrage restriction" on option prices is the principle that the price of an option is such that no strategy can be created using the option and the underlying that generates arbitrage profits. This means that the price of an option must be in line with the underlying asset, with no discrepancy that would allow traders to profit without taking any risk. A, B, and D are incorrect because they do not accurately describe the no-arbitrage restriction principle.

A "No-Arbitrage Restriction" on Option Prices Is the Statement That