Question

Question 19 (1 point) A call sells for $2, while its value implied by the put call parity is $1. How do you make arbitrage profits? buy call, sell put, sell stock, buy bond O buy call, buy put, buy stock, borrow cash O sell call, buy put, buy stock, borrow cash sell call, buy put, sell stock, buy bond

Answer 1

Correct answer: Sell Call, buy put, buy stock, borrow cash

Put Call parity indicates following relationship:

C + X = S + P

where,

C = Call price

X = Present value of Strike price

S = Stock Price

P = Put price

We know we buy underpriced asset and sell overpriced asset.

Call Price in market = $2

Call price as per put call parity = $1

which means Call price is overvalued in market.

Thus, we sell call and borrow money and use fund to Buy stock and Put option, this way we can make arbitrage profit.

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.