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 want to construct a riskless arbitrage to exploit the mispriced puts, you should ________.
A) buy the call and sell the put
B) write the call and buy the put
C) write the call and buy the put and buy the stock and borrow the present value of the exercise price
D) buy the call and buy the put and short the stock and lend the present value of the exercise price

Question

Quizplus · Accepted Answer

For parity to hold, the following condition must be met: C − P = S₀ − Xe^−rT 11eaaae8_8b45_bf57_a4b8_3d871d2e3af1_TB6474_00 Buy what's underpriced (the left side of the equation) and sell what's overpriced (the right side of the equation)

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