A stock priced at $65 has a standard deviation of 30%. Three month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27 and the puts cost $1.10. The risk free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued.
-If you construct a riskless arbitrage to exploit the mispriced puts your arbitrage profit will be
A) $5.75
B) $6.17
C) $0.96
D) $0.43

Question

Quizplus · Accepted Answer

The arbitrage profit is calculated by buying the undervalued put and selling the call, while also buying the stock and borrowing at the risk-free rate. The profit is the difference between the theoretical and actual put price, which is $1.525 - $1.10 = $0.425, rounded to $0.43.

A Stock Priced at $65 Has a Standard Deviation of 30