Thomas Duckworth Owns and Operates Stones Asset Management

question 92

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:

Preexisting Duty Rule

A legal principle stating that performing a duty one is already legally obligated to perform does not constitute valid consideration for a new contract.

Unforeseen Difficulties

Challenges or complications that could not have been predicted or expected, often affecting the execution of plans or projects.

Past Consideration

A concept in contract law that refers to an act or benefit given prior to the promise being made, which therefore does not constitute valid consideration for a contract.

Stock Options

Financial derivatives that give the holder the right, but not the obligation, to buy or sell a stock at a predetermined price within a specific period.