Question

1. Assume that the stock price is $56, call option price is $9, the put option price  is $5,   risk-free rate is 5%, the maturity of both options is 1 year , and the strike price of both options is 58.

   An investor  can __the put option, ___the call option, ___the stock, and ______ to explore the arbitrage opportunity.   

   	A.	sell, buy, short-sell, borrow
   	B.	buy, sell, buy, borrow
   	C.	sell, buy, short-sell, lend
   	D.	buy, sell, buy, lend

Answer 1

Answer 2

To answer this question we should use the put call parity relationship, which says that to explore an arbitrage opportunity, you should sell the put, short the stock, buy a call and buy or lend at tthe risk free rate.

Option C is the correct answer.