There Are Three- and Six-Month European Calls On $A B C$

question 3

Multiple Choice

There are three- and six-month European calls on $A B C$ stock.Suppose the three-month option costs $5 and the six-month option costs $3.Then,there is an arbitrage strategy that involves,among other things,

• A)Buying the three-month call and selling the six-month call.
• B)Buying the six-month call and selling the three-month call.
• C)Buying the three-month and six-month calls,shorting the stock,and investing.
• D)There is not enough information given to answer this question.

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Definitions:

Marginal Cost

The additional cost incurred in the production of one extra unit of a good or service.

Marginal Profit

The additional profit gained from producing or selling one more unit of a good or service.

MR < MC

A condition where marginal revenue is less than marginal cost, suggesting that a firm should reduce its output to maximize profit.

Economic Profits

The excess of total revenues over total costs, including both explicit and implicit costs, reflecting the true profitability of a firm.