The current price of a non-dividend paying stock is $40. A European call option with three months maturity and strike $39 is priced at $2. The risk free rate of interest for three months is 2%. Which of the following statements is correct?
A) The price of the call obeys no-arbitrage restrictions.
B) It is possible to construct a risk-less arbitrage strategy to yield a gain of at least $0.81.
C) It is possible to onstruct a risk-less arbitrage strategy to yield a gain of at least $1.00.
D) It is possible to construct a risk-less arbitrage strategy to yield a gain of at least $1.19.

Question

Quizplus · Accepted Answer

The price of the call option does not allow for riskless arbitrage, meaning it obeys no-arbitrage restrictions. This can be inferred because the option is in-the-money (current stock price > strike price), and its price seems reasonable given the parameters, without explicit calculation showing a violation of no-arbitrage conditions.

The Current Price of a Non-Dividend Paying Stock Is $40