Thomas Duckworth Owns and Operates Stones Asset Management

question 41

Multiple Choice

Thomas Duckworth owns and operates Stones Asset Management.The firm manages $10 billion in assets and focuses on exploiting arbitrage opportunities.Duckworth uses put - call parity to price put and call options.According to his put - call parity analysis Duckworth realizes that puts with a strike price of $30 and 1 month remaining until expiration on Medusa's Inc.should be priced at $2.30.However he realizes that the $30 puts are trading for $2.75 in the open market.How should Duckworth exploit this arbitrage opportunity?

• A) sell the puts in the open market,buy Medusa's stock,short a zero coupon bond with a face value of $30 and maturity of 1 month,and buy a 1 month call with a strike price of $30
• B) buy the puts in the open market,short Medusa's stock,short a zero coupon bond with a face value of $30 and maturity of 1 month,and buy a 1 month call with a strike price of $30
• C) sell the puts in the open market,lend $30 at the risk free rate,buy a 1 month $30 call on Medusa's,and short the underlying stock.
• D) buy a zero coupon bond with a face value of $30 and maturity of 1 month and buy a 1 month call with a strike price of $30

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Definitions:

Premises

Statements or propositions that are presented as the basis for a conclusion, forming the groundwork of an argument or logical reasoning.

Independent

Not influenced by or dependent on something else; having the freedom to act, operate, or decide without being controlled by others.

Dependent

In statistical terms, a variable whose value is influenced or determined by another variable; in general, relying on someone or something else for support or existence.

Deductive Step

A logical step in which a conclusion follows necessarily from the given premises, ensuring that if the premises are true, the conclusion must also be true.