A Stock Is Trading at $70

question 4

Multiple Choice

A stock is trading at $70.A one-month at-the-money call option on the stock is priced at $0.10.The risk free rate of interest is 2%.Which of the following statements is most accurate?

• A)There is no arbitrage opportunity here.
• B)A risk-less arbitrage strategy is to buy the call,short the stock and lend the present value of the strike for one month.
• C)A risk-less arbitrage strategy is to short the call,buy the stock and borrow the present value of the strike for one month.
• D)There is not enough information to decide whether or not there is an arbitrage.

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Definitions:

Entrenched Meanders

River meanders that have cut deeply into the landscape, often in a canyon form, showing a history of flowing through a relatively stable channel for an extended period.

Distributaries

Branches of a river that flow away from its main course, typically seen in delta regions where the river splits into several smaller channels near its mouth.

Alluvial Fans

Cone-shaped deposits of sediment crossed and built up by streams, typically found at the base of mountain ranges where a river exits a steep valley.

Upper Mississippi

Refers to the portion of the Mississippi River that flows from its headwaters to the confluence with the Missouri River.